9 - Trading and Securities

Too Fast, Too Frequent?
High-Frequency Trading and Securities Class Actions

Author(s): Tara E. Levens
Source: The University of Chicago Law Review, Vol. 82, No. 3 (Summer 2015), pp. 15111557
Published by: The University of Chicago Law Review
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Too Fast, Too Frequent? High-Frequency

Trading and Securities Class Actions
Tara E. Levensf
Introduction
An individual investor calls his broker and requests

$100,000 of a certain stock for his portfolio. The broker sees that
shares of that stock are currently being offered at $10 a share,

and that there are 4,000 shares available on the New York Stock
Exchange (NYSE), 3,000 on NASDAQ, and 3,000 on the BATS
Global Exchange, for a total of 10,000 shares.1 Satisfied with his

ability to fulfill his client's request, the broker hits "submit" only to find that these offerings have disappeared and that the
cheapest offering price of the stock is now above $10 a share, resulting in a purchase of fewer than the expected 10,000 shares
for his client.
This rapid, blink-of-an-eye increase in price is but one side

effect of high-frequency trading (HFT), the newest technology to
affect the stock market. Because the broker in our story was lo-
cated at different physical distances from the NYSE, NASDAQ,

and BATS servers, the various pieces of his order reached each
exchange at different times. Due to faster fiber-optic cables and
closer proximity to the exchanges' servers, high-frequency traders saw the first portion of the broker's order on one exchange,
registered that he was interested in purchasing that security,
bought it themselves on the second exchange, and offered it back
to the broker at a higher price when his request reached the second exchange - and so on, until his order was filled. As a result,
after the broker completed the order, his client ended up with
f BA 2012, The University of Chicago; JD Candidate 2016, The University of
Chicago Law School.
1 The BATS Global Exchange is currently one of the largest US equities-market
operators. As of April 1, 2015, NYSE had a 22.20 percent market share, NASDAQ had
18.79 percent, and BATS had 22.61 percent. See U.S. Equities Market Volume Summary
(BATS Global Markets), archived at http://perma.cc/C69K-2EFR. BATS operates four
different exchanges: BATS BZX Exchange, BYX Exchange, EDGA Exchange, and EDGX
Exchange. The latter two exchanges were formerly known as the Direct Edge Exchange
and have been acquired by BATS.
1511
1512 The University of Chicago Law Review [82:1511
fewer than the anticipated 10,000 shares due to the increased

share price - all because high-frequency traders saw the order
coming.
HFT has been gaining traction in the marketplace since the

late 2000s and will likely continue to increase its share over
time as investors seek access to higher speeds and faster trades.
Along with the advantages of increased speed, however, come
many negative effects for investors still utilizing slower, moreconventional electronic trading strategies. Such investors, stung
by lost profits and increased prices, have begun to seek protection and relief through the federal securities laws - but how like-
ly are their claims to succeed? And, in the event that HFT becomes a standard practice among investors, how should litigants
in securities class actions react to this new technology?
This Comment addresses these questions in three parts.
Part I lays out the existing legal framework behind securitiesfraud class actions and the fraud-on-the-market presumption of
reliance that has proven so vital to these class actions. Part II
provides an overview of technical HFT strategies and mechanisms, discusses HFT's impact on market efficiency, and then
evaluates current legal challenges to HFT. Finally, Part III explores the various strategies available to plaintiffs seeking to recover against HFT firms and argues for both a hybrid misrepresentation/manipulation theory of liability as well as further
exploration of an open-market manipulation theory of liability.
In addition, Part III addresses the possibility that investors using HFT strategies may seek access to the courts as plaintiffs
and argues that procedural hurdles will pose unique difficulties
if such suits are brought as class actions.
I. The Existing Framework of Securities-Fraud Class
Actions
The advent of HFT presents complicated issues within the

existing landscape of securities-fraud class actions. To fully understand these changes and determine the best ways of incorporating high-frequency traders into the legal arena, it is first nec-
essary to examine how investors currently seek recourse for
losses incurred on the market.
This Part proceeds in two stages. Part I.A provides an

overview of securities-fraud class actions and the requirements
for pleading a prima facie case of securities fraud. It focuses on
the provisions relating to manipulation and distinguishes the
2015] Too Fast, Too Frequent? 1513
various causes of action arising from 9 and 10(b) of the Securities Exchange Act of 19342 ("Exchange Act"). Part I.B then
explains the difficulties in satisfying the procedural requirements of Federal Rule of Civil Procedure (FRCP) 23(b)(3) and
introduces the accepted solution to this problem: the fraud-onthe-market presumption of reliance. Part I.B also explores the
theoretical foundation of fraud on the market, the predicates
required to invoke the presumption, and the methods by which
defendants can rebut the presumption. After summarizing current litigation aimed specifically at the various requirements of
the fraud-on-the-market presumption, Part I.B identifies changes that recent cases have made to courts' understandings of
those predicates and analyzes the most recent Supreme Court
case addressing the fraud-on-the-market presumption.
A. Causes of Action under the Exchange Act
Plaintiffs seeking recovery for losses incurred during trading can look to many federal statutory provisions. The provisions
most relevant to HFT are those addressing market manipulation
and deceptive conduct. This Section outlines the pleading requirements for claims of fraudulent misrepresentation under
10(b) and also addresses the less commonly utilized open mar-
ket and 9 theories of manipulation.
1. Liability for fraudulent misrepresentations under

10(b) and Rule 10b-5.
Securities-fraud claims are most often brought under 10(b)
of the Exchange Act, which bars the use of "any manipulative or
deceptive device" in contravention of any rules or regulations in-
volving the national securities exchanges.3 Section 10(b) has
been referred to as a "catchall provision," as it "lumps together

into a brief, all-encompassing rule the prohibitions on market
manipulation and on material misrepresentations or omissions,
categorizing them all as species of 'fraud' or 'deceit.'"4 After the
passage of the Exchange Act, the Securities and Exchange
Commission (SEC) promulgated Rule 10b-5, which prohibits any

act or omission resulting in fraud or deceit in connection with
2 Pub L No 73-291, 48 Stat 881, codified as amended at 15 USC 78a et seq.
3 15 USC 78j(b).
4 Charles R. Korsmo, Mismatch: The Misuse of Market Efficiency in Market Manipulation Class Actions, 52 Wm & Mary L Rev 1111, 1120-21 (2011).
the purchase or sale of any security.5 While neither 10(b) nor

Rule 10b-5 expressly provides for a private right of action, courts
have recognized such actions as implied by both the statute and

the regulation.6 Civil actions and SEC enforcement actions
brought under a Rule 10b-5 theory of liability typically allege
material misrepresentations or omissions, often made in quarterly phone calls reporting earnings to investors or in other pub-
lic pronouncements by issuers and their executives once a security is trading in the secondary markets. The Rule was enacted
in part to combat such dishonest practices.7 To prevail in a Rule
10b-5 action, a private plaintiff must prove six elements: "(1) a
material misrepresentation or omission by the defendant;
(2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon
the misrepresentation or omission; (5) economic loss; and (6) loss
causation."8
2. Market manipulation and open- market manipulation

under 10(b).
In addition to allegations of fraudulent misrepresentation,
plaintiffs may also bring market manipulation claims under
10(b). Such claims have received "curiously little attention"
5 Rule 10b-5 provides, in relevant part, that it is unlawful for any person:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a mate-
rial fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

17 CFR 240.10b-5.
6 See Superintendent of Insurance of New York v Bankers Life & Casualty Co, 404
US 6, 13 n 9 (1971).
7 See Securities Exchange Bill of 1934, HR Rep No 73-1383, 73d Cong, 2d Sess 11
(1934) ("To make effective the prohibitions against manipulation civil redress is given to
those able to prove actual damages from any of the prohibited practices."); Federal Securities Exchange Act of 1934, S Rep No 73-792, 73d Cong, 2d Sess 7-8 (1934) (stating that
the bill bans "the dissemination of false information and tipster sheets").
8 Amgen Ine v Connecticut Retirement Plans and Trust Funds , 133 S Ct 1184, 1192
(2013) (quotation marks omitted). This Comment focuses on Rule 10b-5 actions brought
by private plaintiffs; note that SEC enforcement actions have different pleading
standards. See, for example, Securities and Exchange Commission v Wolfson, 539 F3d
1249, 1256 (10th Cir 2008), quoting Geman v Securities and Exchange Commission, 334
F3d 1183, 1191 (10th Cir 2003) ("Unlike private litigants proceeding under 10(b), '[t]he
SEC is not required to prove reliance or injury in enforcement actions.'").
from plaintiffs, prosecutors, and courts.9 The elements of a prima facie case are slightly different from those of a misrepresentation claim and consist of the following: "(1) manipulative acts;
(2) damage (3) caused by reliance on an assumption of an efficient market free of manipulation; (4) scienter; (5) in connection
with the purchase or sale of securities; (6) furthered by the defendant's use of the mails or any facility of a national securities
exchange."10 As a result of the different pleading requirements, a
plaintiff in the early stages of a market manipulation case "need
not plead manipulation to the same degree of specificity as a
plain misrepresentation claim."11
An alternative, more highly contested theory of liability under 10(b) and Rule 10b-5, which takes market manipulation as
its starting point, is that of open-market manipulation. The distinction between these two theories lies in how the alleged manipulator creates the price movement that causes his profit: tra-
ditional manipulation involves conduct that is "inherently or

otherwise illegal, such as fictitious transactions, wash sales," or
the dissemination of false reporting,12 whereas open-market manipulation consists of facially legitimate transactions that make
the fraud harder to detect.13 Claims of open-market manipulation allege attempts to "increase the price of a security or commodity by trading, and to sell at a profit before the price returns
to its 'correct' level."14 However, because these transactions are
otherwise-unremarkable trades, courts have hesitated to condemn this behavior when the claims are based solely on manipulative intent, and they have varied in their treatment of this issue. For example, the Third Circuit has held that manipulative
intent alone is an insufficient basis for liability and requires a
further showing "that the alleged manipulator injected 'inaccurate information' into the market or created a false impression
9 Barbara Black, The Strange Case of Fraud on the Market: A Label in Search of a
Theory , 52 Albany L Rev 923, 950 (1988).
10 ATSI Communications, lne v Shaar Fund, Ltd , 493 F3d 87, 101 (2d Cir 2007).
11 Id at 102. Claims of manipulation must describe the "nature, purpose, and effect
of the fraudulent conduct and the roles of the defendants." Id. More general claims of
misrepresentation, on the other hand, require identification of the precise statements
relied on by the plaintiffs and greater factual detail. See Amgen , 133 S Ct at 1192.
12 Maxwell K. Multer, Open-Market Manipulation under SEC Rule 10b-5 and Its
Analogues: Inappropriate Distinctions, Judicial Disagreement and Case Study; Fere's
Anti-manipulation Rule , 39 Sec Reg L J 97, 98 (2011).
13 See id at 101-02.
14 Id at 103.
of market activity."15 In contrast, the DC Circuit has instead re-
lied on the legislative intent underlying the Exchange Act to

find that open-market transactions can constitute market ma-
nipulation if done with manipulative intent.16

The Second Circuit has been the leader in identifying the el-
ements of an open-market manipulation claim. These include

profit or other personal gain to the alleged manipulator, deceptive intent, domination in the market for the shares at issue,
and the economic reasonableness of the allegedly fraudulent
transaction.17 The market-domination factor looks to the percentage of trades carried out by any one actor and views this
percentage "in light of the time period involved and other indicia
of manipulation."18 The United States District Court for the
Southern District of New York has interpreted "other indicia" to
include such factors as whether the domination is alleged either
over a long period or instead over a shorter period in conjunction
with other fraudulent actions.19 Despite these attempts to clarify
the standards of an open-market manipulation claim, this doctrine has remained largely absent from federal securities litigation. However, as discussed below in Part III. A, the advent of
aggressive HFT strategies may provide the opening needed for
fuller development of this theory.
3. Market manipulation under 9.
An alternative to claims brought under 10(b) are claims

brought under 9 of the Exchange Act.20 While 9 expressly ad-
dresses the manipulation of securities prices, it does not include
the reliance requirement present in 10(b) and Rule 10b-5.21
However, 9 does require a showing of specific intent "for the
purpose of inducing the purchase or sale of such security by

others" or "for the purpose of creating a false or misleading
15 GFL Advantage Fund, Ltd v Colkitt , 272 F3d 189, 205 (3d Cir 2001).
16 See Securities and Exchange Commission v Masri , 523 F Supp 2d 361, 368
(SDNY 2007), citing Markowski v Securities and Exchange Commission, 274 F3d 525,
527-28 (DC Cir 2001), and quoting HR Rep No 73-1383 at 20 (cited in note 7) (stating
that a trader's transactions "become unlawful only when they are made for the purpose
of raising or depressing the market price") (quotation marks omitted).
17 See United States v Mulheren , 938 F2d 364, 370-72 (2d Cir 1991).
is Id at 371.
19 See In re College Bound Consolidated Litigation , 1995 WL 450486, *6 (SDNY).

20 15 USC 78i.
21 See Adam C. Pritchard, Stoneridge Investment Partners v Scientific- Atlanta:
The Political Economy of Securities Class Action Reform , 2008 Cato S Ct Rev 217, 235.
appearance" of market activity.22 This standard has proven challenging for plaintiffs to meet, given the many different factors
that can affect a security's price.23 Consequently, while courts often look to 9 for guidance as to the types of behaviors and results that Congress intended to prohibit with the Exchange Act,
plaintiffs and prosecutors rarely rely on 9 when bringing manipulation proceedings.24
B. The Fraud-on-the-Market Presumption of Reliance

Of the theories of liability discussed above, claims of fraudu-
lent misrepresentation brought under 10(b) and Rule 10b-5

have been the most prevalent. However, such claims are not
without procedural hurdles of their own. Specifically, the reliance prong of Rule 10b-5 tends to create difficulties for plaintiffs
in securities-fraud class actions. Because of the potential for

both negative publicity and frivolous class actions brought solely
to induce settlement, large public companies have become particularly wary of letting securities-fraud class actions proceed to
trial, and consequently class certification has become the "key
legal battleground" of these cases.25
A class can be certified under FRCP 23 only if the plaintiffs
have met the requirements of numerosity, commonality, typicality, and adequacy.26 Securities class actions are typically brought
under FRCP 23(b)(3), which additionally requires that "ques-
tions of law or fact common to class members predominate over

any questions affecting only individual members, and that a
class action is superior" to other methods of adjudication.27 However, without a classwide determination of reliance, "individual
questions of reliance would predominate and claims of multiple
investors could not be aggregated in a class action" under FRCP
23(b)(3).28 "[R]equiring proof of individualized reliance" from
22 15 USC 78i.
23 See Pritchard, 2008 Cato S Ct Rev at 235 (cited in note 21).
24 See Multer, 39 Sec Reg L J at 106 (cited in note 12).
25 Larry Bumgardner, The Fraud-on-the-Market Method of Proving Securities

Fraud: Indispensable Theory, or Device to Induce Settlements ?, 10 J Global Bus Mgmt
121, 121 (2014).
26 See FRCP 23(a).

27 FRCP 23(b)(3). Securities class actions seeking monetary damages cannot be
brought under FRCP 23(b)(2) as they do not seek declaratory or injunctive relief, and
typically are not proper under FRCP 23(b)(1) as there is rarely a risk of "inconsistent or
varying adjudications" or harm to absent class members. FRCP 23(b)(l)-(2).
28 Barbara Black, Behavioral Economics and Investor Protection: Reasonable Investors, Efficient Markets , 44 Loyola U Chi L J 1493, 1497 (2013).
every plaintiff class member would prevent many suits from

proceeding;29 because the many shareholders in a putative class
probably bought or sold their shares "at various times, and for
different reasons, [ ] the reliance issue could vary greatly from
case to case."30 Preventing class certification in effect prevents
plaintiffs from getting these claims into court entirely, as individualized damages are almost always too low to offset litigation
costs.31
To avoid this problem, plaintiffs can - in appropriate cases satisfy the reliance prong by asserting the fraud-on-the-market
presumption of reliance rather than alleging direct reliance on
the defendant's misrepresentations. While the fraud-on-themarket presumption emerged in Basic lne v Levinson32 as a
"judicially created doctrine designed to implement a judicially
created cause of action,"33 it has since become a "substantive
doctrine of federal securities-fraud law."34 This Section explains
the framework of the presumption, discusses litigation regard-
ing the presumption's predicates, and then examines the Su-
preme Court's most recent case addressing this issue.
1. Asserting and rebutting the fraud-on-the-market

presumption.
The fraud-on-the-market presumption of reliance is based

on the hypothesis that in an efficient, well- developed market, all
public information about a company is reflected in the company's stock price and that "[a]n investor who buys or sells stock at
the price set by the market does so in reliance on the integrity of
[the market] price."35 When the presumption is available, plain-
tiffs can assert that there was a fraud on the market and elimi-
nate the need to prove individual reliance with respect to certain

federal securities-law claims - a need that would otherwise prohibit class certification.36 In an efficient market, the effects of
public information are reflected in the market price of the

29 Halliburton Co v Erica P. John Fund, Ine , 134 S Ct 2398, 2407-08 (2014)
("Halliburton II"), quoting Basic Ine v Levinson , 485 US 224, 242 (1988) (quotation
marks omitted).
30 Bumgardner, 10 J Global Bus Mgmt at 122 (cited in note 25).

31 See id.
32 485 US 224 (1988).

33 Halliburton 7/, 134 S Ct at 2411.
3* Amgen , 133 S Ct at 1193.
3& Basic, 485 US at 247.
36 See Bumgardner, 10 J Global Bus Mgmt at 121 (cited in note 25).
stock - making the plaintiffs' reliance on the market price essentially equivalent to their direct reliance on the defendant's misrepresentations.37 To invoke this presumption, plaintiffs must
prove that: "(1) the alleged misrepresentations were publicly
known, (2) they were material, (3) the stock was traded in an efficient market, and (4) the plaintiff traded the stock between
when the misrepresentations were made and when the truth
was revealed"38 (which is often done via corrective disclosures to,
or adjustments of, earnings estimates).
Fulfilling these predicates creates a presumption that the
alleged misrepresentations affected the market price, which defendants can rebut in several ways. Typically, a rebuttal consists of "[a]ny showing that severs the link between the alleged
misrepresentation and either the price received (or paid) by the
plaintiff, or his decision to trade at a fair market price."39 Such
a showing must also establish the absence of "price impact," de-
fined as the misrepresentation's distortion of the security's

price such that the resulting price differs from what it would
have been but for the misrepresentation.40 After the Supreme
Court's recent decision in Halliburton Co v Erica P. John
Fund, Ine 41 ("Halliburton II"), defendants may introduce priceimpact evidence at the class-certification stage for the purpose of
rebutting the presumption.42 Defendants can further rebut the
presumption by showing that the plaintiffs knew of the omitted
or misstated facts,43 or by showing that the plaintiffs would have
traded at the same price even if they had been aware of the alleged misrepresentation.44 Similarly, by introducing evidence
that the market price did not change in response to a particular
representation, defendants can imply that either the misrepresentation was inconsequential or the market was inefficient.45 In
37 See Basic, 485 US at 241-42.

38 Halliburton II, 134 S Ct at 2413.
39 Basic , 485 US at 248.
40 Halliburton II, 134 S Ct at 2416-17.
41 134 S Ct 2398 (2014).
42 Id at 2413-14.
43 See, for example, Zobrist v Coal-X, Ine, 708 F2d 1511, 1517-19 (10th Cir 1983)
(finding no reliance because the plaintiff was considered knowledgeable of warnings contradicting the misrepresentations).
44 See, for example, Gianukos v Loeb Rhoades & Co, 822 F2d 648, 656 (7th Cir
1987) (finding no reliance because the plaintiffs' decision to trade was based on insider
information rather than on the market price).
45 See, for example, Halliburton II, 134 S Ct at 2415 (noting that defendants may
introduce evidence "to refute the plaintiffs' claim of general market efficiency").
certain situations, defendants can also assert a "truth-on-themarket" defense, which refutes the materiality of the misleading
disclosure by showing that corrective information in the marketplace countered any negative effects of the original statement.46 If the presumption is successfully rebutted, plaintiffs
must instead prove reliance on an individual basis, which poses
substantial difficulties to proceeding as a class action.47
2. Litigation regarding the fraud-on-the-market predicates.
The intricacies and specific requirements of the fraud-onthe-market predicates have been the subject of much litigation
in the years since Basic. This Section addresses the leading
cases involving the two most contentious factors: market efficiency and price impact, which underlie the misrepresentation,
materiality, and loss-causation predicates. Successfully proving
either of these requirements often involves economics-heavy expert reports, and both have been discussed often in recent years.
a) Cammer v Bloom: determining market efficiency.
Generally, a determination of market efficiency examines
whether the market price for a particular security responds to
material public information.49 The efficiency prong of the Basic
presumption is based on the efficient capital markets hypothesis, a controversial topic in the economics literature.50 This hypothesis asserts that in an efficient market, a security's price
fully reflects all publicly available information regarding a company and its stock because informed traders quickly notice and
46 See, for example, Kaplan v Rose, 49 F3d 1363, 1376-77 (9th Cir 1994) (finding a
genuine issue of fact as to whether the information available in the market was "transmitted to the public with a degree of intensity and credibility sufficient to effectively
counterbalance [the defendant's] allegedly misleading statements") (quotation marks
omitted).
47 See Halliburton II, 134 S Ct at 2406.
4 711 F Supp 1264 (D NJ 1989).

49 See id at 1273 n 11. See also Eugene F. Fama, Efficient Capital Markets : A Review of Theory and Empirical Work , 25 J Fin 383, 383 (1970) (defining "efficient stock
market" as a market in which stock prices reflect all potentially available information
that is relevant to the economic value of the stocks).
50 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

2013 was awarded to "the leading proponents of opposing views" of the hypothesis - "one,
the theory's author, the other, its most influential critic." Brief for Former SEC Commissioners and Officials and Law Professors as Amici Curiae Supporting Petitioners, Halliburton Co v Erica P. John Fund, Ine , Docket No 13-317, *6 (US filed Jan 6, 2014) (available on Westlaw at 2014 WL 69391) ("Law Professors' Brief') (quotation marks omitted).
take advantage of pricing errors - thereby nudging the price toward its proper (most efficient) level.61
In determining market efficiency, most courts rely on the
factors laid out in Cammer: the average weekly trading volume,
the number of analysts following the stock, the number of market makers52 and arbitrageurs,63 the issuing company's eligibility
to file a Form S-3 registration statement,64 and the cause-andeffect relationship between corporate events or financial releases
and the stock price.55 Courts disagree about whether all of these
factors must be satisfied, which are the most important, which
should be the most heavily weighted, and what the appropriate
thresholds are for satisfying each factor.66 At a minimum, however, most courts agree that plaintiffs must prove that they
traded on an "open and developed" or a "well-developed" market.67 Later courts have interpreted "developed markets" as generally referring to large, impersonal, actively traded markets, in
contrast to "undeveloped markets" such as "thin markets and
markets for new offerings and restricted resale securities."68
Through litigation, courts have determined that certain
markets and exchanges should be considered presumptively effi-
cient. Such markets include large national exchanges like the

NYSE, as these exchanges are "generally populated by stocks
that are closely watched by analysts and that trade at a high
volume."69 The Cammer court even went so far as to say that this
51 See Ronald J. Gilson and Reinier Kraakman, The Mechanisms of Market Efficiency Twenty Years Later : The Hindsight Bias, 28 J Corp L 715, 723 (2003) (explaining
the history and assumptions of the efficient- markets hypothesis).
52 "Market makers" are dealers who hold themselves out as willing to trade securities for their own accounts on a "regular or continuous basis," effectively creating a market for the security. 15 USC 78c(a)(38).
53 "Arbitrageurs" are traders who identify and eliminate disparities between the
price and the perceived market value of the security. See Sullivan & Long, Ine v Scattered Corp , 47 F3d 857, 862 (7th Cir 1995).
54 Form S-3 "is the 'short form' used by eligible domestic companies to register securities offerings" and helps companies avoid costs associated with filing amendments to
registration statements. Securities and Exchange Commission, Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, 72 Fed Reg
73534, 73534-35 (2007), amending 17 CFR 230, 239.
55 See Cammer , 711 F Supp at 1287.
56 See, for example, Donald C. Langevoort, Basic at Twenty: Rethinking Fraud on
the Market , 2009 Wis L Rev 151, 154, 167 (noting that "[t]he law is confused, and in
flux," and that "[t]he jumble [in determining efficiency! is evident").
57 Basic y 485 US at 241, 244, 246-48 (quotation marks omitted).
58 Cammer , 711 F Supp at 1277.
59 Local 703, LB. of T. Grocery & Food Employees Welfare Fund v Regions Financial Corp , 762 F3d 1248, 1257 (11th Cir 2014). See also In re DVI, Ine Securities
1 522 The University of Chicago Law Review [82 : 1 5 1 1
presumption of efficiency should "probably [be] conditional for

class determination."60 For securities trading on these exchanges, defendants can rebut the presumption of market efficiency by showing that the security in question was inactively
traded or unresponsive to new information.61 At the very least,
such markets have all the characteristics necessary to satisfy
Basic's "open and developed" requirement.62
b) The Halliburton cases: loss causation and price impact.
The fraud-on-the-market theory was again thrust to the forefront of the Supreme Court's securities jurisprudence in the
partner cases Erica P. John Fund, Ine v Halliburton Co 63 ("Halliburton I") and Halliburton II. The Erica P. John Fund, as the
lead plaintiff in a putative class action of similarly situated Halliburton investors, alleged that over a period of two and a half
years Halliburton made a series of misrepresentations about its
potential liability in an ongoing asbestos litigation, including
overstatements of its expected revenue from construction contracts and the anticipated benefits of a future merger.64 Halliburton later made a number of corrective disclosures that allegedly caused a drop in its stock price and a corresponding injury
to investors.65 The suit's procedural history involved two trips to
the Supreme Court. Halliburton I, decided in 2011, involved a

determination of whether class certification requires proof of
loss causation (the Court held that it does not)66 but did not address any other question involving the fraud-on-the-market presumption or rebuttal thereof. The case was remanded to the district court for further proceedings, which eventually resulted in
Halliburton II in 2014.67
Before evaluating the Court's decision in Halliburton II, it

is important to note that the first three predicates for invoking
Litigation , 639 F3d 623, 634 (3d Cir 2011) ("[T]he listing of a security on a major
exchange such as the NYSE or the NASDAQ weighs in favor of a finding of market
efficiency.").
60 Cammer , 711 F Supp at 1292.

61 See id. See also Alan R. Bromberg, Lewis D. Lowenfels, and Michael J. Sullivan,
5 Bromberg and Lowenfels on Securities Fraud 7.484, 7-928 to -929 (Thomson Reuters
2d ed 2014) (noting that such markets include the NYSE, the American Stock Exchange,
the Chicago Board Options Exchange, and the NASDAQ National Market System).
62 Cammer , 711 F Supp at 1285-87.
63 131 SCt 2179 (2011).
64 Halliburton 77, 134 S Ct at 2405-06.
65 Id.
66 Halliburton 7, 131 S Ct at 2184-86.

67 Halliburton 77, 134 S Ct at 2406.
the fraud-on-the-market presumption - publicly known misrepresentations, materiality, and trading on an efficient market - speak to price impact. "Price impact" generally refers to
whether the market specifically responded to information about
the exact issuer at the exact time that the information became
publicly available.68 "In the absence of price impact, Basic's

fraud-on-the-market theory and presumption of reliance collapse" because the fundamental premise of the presumption is
that the alleged misrepresentation was reflected in the market
price at the time of the relevant transaction.69 Before Halliburton II, there was no doubt that defendants could introduce priceimpact evidence at the class-certification stage "so long as it
[was] for the purpose of countering a plaintiffs showing of market efficiency, rather than directly rebutting the presumption."70
Indeed, plaintiffs frequently introduce price-impact evidence in

connection with event studies - expert reports and regression
analyses showing the impact, if any, of "pertinent publicly reported events" or information on the market price of the defendant's stock.71 The Court therefore could not find a good reason to
prevent defendants from similarly submitting price-impact evidence prior to class certification.72
However, the precise issue in Halliburton II was the purpose for which defendants may introduce such evidence at the
class-certification stage. Halliburton sought to introduce this evidence for the purpose of rebutting the presumption entirely; as
plaintiffs, the Erica P. John Fund and other institutional investors wanted the evidence limited to the issue of market efficien-
cy such that the price-impact issue would be decided after class

certification at the merits stage.73 Chief Justice John Roberts,
writing for the Court, noted that it "makes no sense" to keep defendants from relying on the same evidence prior to class certifi-
cation for the particular purpose of rebutting the presumption

altogether, and that such a restriction would have unnecessarily
costly results.74
68 Halliburton I, 131 S Ct at 2187.

69 Halliburton II, 134 S Ct at 2414 (citations omitted).
70 Id at 2414-15.
71 Id at 2415.
72 Id.
73 Halliburton II, 134 S Ct at 2415.

74 Id at 2415-16.
3. Halliburton lis impact on securities class actions.

Halliburton II has changed the landscape of securities-fraud
class actions. As defendants are now allowed to introduce evi-
dence at the class-certification stage for the purpose of rebutting
the fraud-on-the-market presumption entirely, it is likely that

more event studies will make their way into securities-fraud
litigation.75 In addition, because the defendant's introduction of
this evidence is no longer cabined to refuting the plaintiffs'
showing of market efficiency, event studies will presumably attack other prongs of the presumption as well. Of the established
predicates, loss causation seems like an especially vulnerable
target - indeed, there is a well-developed body of literature examining the impact that event studies have on proving or disproving showings of loss causation.76
Event studies are a type of expert report, often in the form
of a statistical regression analysis, that examine the effect of an
event on a dependent variable such as the price of a security.77
These analyses seek to measure the impact of an event on a given security's price; the procedures they follow can be generalized
into four broad steps. First, the expert identifies the event that
caused investors to change their expectations about the security's value and determines the period of time in which the public
learned of the event.78 Second, the expert measures the security's value for that period, typically by looking to the returns on
the day of the event. Third, the expert determines whether the
event affected the security's value by comparing that day's returns to the security's expected returns for the same period. This
step involves implementing a variety of statistical and economic
models to predict the price of the security and often compares its
performance to other related or comparable securities. Finally,
75 See generally Kristin Feitzinger and Amir Rozen, Halliburton II and the Importance of Economic Analysis Prior to Class Certification (Cornerstone, 2014), archived
at http://perma.cc/H7U2-SXYC ("Going forward, [event studies] . . . will [ ] be key tools
for defendants seeking to establish prior to class certification that an alleged misrepresentation did not impact price.").
76 See, for example, Michael J. Kaufman and John M. Wunderlich, Regressing: The
Troubling Dispositive Role of Event Studies in Securities Fraud Litigation , 15 Stan J L
Bus & Fin 183, 208-10 (2009) (noting that event studies are now an "essential element"
of showing loss causation in a securities-fraud case).
77 See Jay W. Eisenhofer, Geoffrey C. Jarvis, and James R. Banko, Securities
Fraud, Stock Price Valuation, and Loss Causation : Toward a Corporate Finance-Based
Theory of Loss Causation , 59 Bus Law 1419, 1425 (2004).
78 These events are typically corporate announcements, such as earnings restatements or talks of mergers and acquisitions.
the expert estimates the event's effects and determines whether

the abnormal returns are statistically significant and causally
related to the event. At this stage, the expert must also determine whether there were other events that might have affected
the security's value during the same period.79
Even with this established framework, however, the introduction of more event studies at the class-certification stage
seems unlikely to systematically tip the scale in favor of either
plaintiffs or defendants. Because of the parties' competing incentives, the introduction of such evidence is likely to turn into a
battle of the experts. Plaintiffs' experts will define the fraud as
broadly as possible so that any and all of the company's announcements that potentially harmed the stock price will be
considered related to the fraud; defendants' experts will attempt
to parse every announcement made by a company in order to
isolate factors that negatively impacted the stock price but were
not related to the alleged fraud.80 As a result of this potential
battle of the experts, courts and juries will have to make their
own determinations regarding which expert is correct in each
situation - leading to potentially unpredictable outcomes.81
In the wake of Halliburton II, it is not yet evident whether
the number of event studies introduced at the class-certification
stage will increase or whether these studies will push courts in

either a pro-plaintiff or a pro-defendant direction. One early
study has found that the number of class-certification motions
granted has dropped; however, this study also found that the
first three post- Halliburton II rulings on motions to dismiss
filed in Rule 10b-5 class actions each considered the defendants'
price-impact arguments while ruling for the plaintiffs and granting class certification.82 While three cases are too few to indicate
79 For a more in-depth explanation and analysis of these steps, see Sanjai Bhagat
and Roberta Romano, Event Studies and the Law : Part 1 ; Technique and Corporate Litigation , 4 Am L & Econ Rev 141, 143-47 (2002).
80 See Eisenhofer, Jarvis, and Banko, 59 Bus Law at 1427-28 (cited in note 77).
81 See In re Thornburg Mortgage, Ine Securities Litigation, 912 F Supp 2d 1178,

1242 (D NM 2012), quoting In re Warner Communications Securities Litigation , 618 F
Supp 735, 744 (SDNY 1985) ("Damages in this case, as is common in securities class actions, would likely have been reduced to a 'battle of the experts,' and 'it is virtually impossible to predict with any certainty which testimony would be credited.'"). See also In
re Cendant Corp Litigation, 264 F3d 201, 253-54 (3d Cir 2001) (noting that a court's
choice between two competing expert opinions is "intensely fact-based" and "within the
purview of the District Court's discretion").
82 Renzo Comolli and Svetlana Starykh, Recent Trends in Securities Class Action
Litigation: 2014 Full-Year Review *19-21 (NERA, Jan 20, 2015), archived at
a trend, it is possible that the rate at which motions for class

certification are granted post- Halliburton II will be higher than
the 75 percent rate at which courts granted such motions from
2000 through the end of 2014.83 It remains to be seen whether
this development will continue, and if it does, whether an increase in grants of class certification will lead to a corresponding
increase in adjudication on the merits for plaintiffs.
II. HFT Today: New Technologies and New Litigation
Challenges
Against this backdrop, HFT raises additional problems and

questions regarding whether and how the federal securities laws
should apply to circumstances involving this type of trading.
HFT is very technical, and as such, any discussion of the law regarding HFT benefits from an understanding of HFT's mechanics. Part II. A presents a basic overview of the strategies behind
HFT, as well as some of the benefits and criticisms that have
been identified in early literature. Part II.B briefly summarizes
the heated and extensive debate over HFT's impact on market
efficiency. Part II.C then provides an overview of SEC regulatory activity regarding HFT and current litigation involving HFT.
A. The Basics of HFT
While electronic trading has become the status quo in the

marketplace, HFT takes computerized trading several steps further and involves strategies that are much more technical than
merely pressing "enter" to submit an order. Generally, highfrequency traders use computer codes to submit rapid-fire bids
and offers, which create short-term markets and enable traders
to realize marginal profits on price imbalances.84 Firms that utilize HFT algorithms obtain split-second advantages over firms
that are still using conventional computerized trading. Supporters say this advantage improves market liquidity, while critics
argue that these advantages can, among other consequences,
mask market manipulation and destroy the structure of capital
http://perma.cc/8US6-MHQ5. These three Rule 10b-5 class actions are: Mclntire v China
MediaExpress Holdings, Ine , 38 F Supp 3d 415, 434 (SDNY 2014); Aranaz v Catalyst
Pharmaceutical Partners Ine , 302 FRD 657, 672 (SD Fla 2014); and Wallace v Intralinks ,
302 FRD 310, 317 (SDNY 2014).
83 Comolli and Starykh, Recent Trends at *19 (cited m note 82).
84 See Frank J. Fabozzi, Sergio M. Focardi, and Caroline Jonas, High- Frequency
Trading: Methodologies and Market Impact , 19 Rev Fut Mkts 7, 8-9 (special issue 2011).
markets.85 Firms employing HFT strategies often trade on open,

public markets including the NYSE and NASDAQ; recent studies estimate that HFT now accounts for over 70 percent of all
trades in US equity markets.86 It is important to note at the outset that currently most HFT is done by banks' and trading firms'
in-house proprietary accounts - that is, on behalf of banks or
firms rather than on behalf of outside, individual investors.87
HFT is a subset of algorithmic trading, which generally relies on computers to enter trading orders and uses algorithms to
determine various aspects of the orders such as timing, price,
and quantity. Behavior involving HFT is roughly classified as
one of two types: market-making activities, in which traders
hold themselves out as willing to trade in order to create and
profit from the demand for a security; or more aggressive HFT
strategies like statistical arbitrage, in which traders seek to
profit by trading on the miniscule price discrepancies identified
by statistical models.88 In a recent concept release, the SEC
identified five general characteristics that are often attributed to

HFT, regardless of the specific type of strategy employed:
(1) The use of extraordinarily high-speed and sophisticated

computer programs for generating, routing, and executing
orders; (2) use of co-location services and individual data
feeds offered by exchanges and others to minimize network
and other types of latencies; (3) very short time-frames for
establishing and liquidating positions; (4) the submission of
numerous orders that are cancelled shortly after submission; and (5) ending the trading day in as close to a flat position as possible (that is, not carrying significant, unhedged
positions overnight).89
The various technical strategies used in HFT rely on different sources of information, statistical comparisons, and types of
85 See Nathan D. Brown, Comment, The Rise of High Frequency Trading: The Role
Algorithms, and the Lack of Regulations, Play in Today's Stock Market , 11 Appalachian J
L 209, 210 (2012).
86 See, for example, Fabozzi, Focardi, and Jonas, 19 Rev Fut Mkts at 23 (cited in
note 84).
87 See Gary Shorter and Rena S. Miller, High-Frequency Trading: Background,
Concerns, and Regulatory Developments *6 & n 19, 13 (Congressional Research Service,

June 19, 2014), archived at http://perma.cc/QZ6K-Y4LR.
88 See X. Frank Zhang, High-Frequency Trading, Stock Volatility, and Price Discovery *5 (December 2010), archived at http://perma.cc/V25V-BB9D.
89 Securities and Exchange Commission, Concept Release on Equity Market Structure, 75 Fed Reg 3594, 3606 (2010).
algorithms.90 When employing "arbitrage strategies," algorithms

correlate prices among securities trading on different markets
and trade off the imbalances in those prices, which can be as
small as a fraction of a penny.91 In "pairs trading," programs
look at a correlation between the securities of two similar com-
panies (for example, Coca-Cola and Pepsi) and trade on the

movement of one or the other security - if the price of one moves
up, there is an expectation that the other will move up as well.92
A variation of pairs trading involves "cross-asset pairs trading,"

in which algorithms examine the correlation between a derivative and its underlying asset.93 "Short-term statistical arbitrage"
is yet another, more complex variation of pairs trading, which
focuses on the inefficient pricing of securities as identified from
statistical models.94 Traders can also use a strategy of "volatility
trading," in which algorithms trade on fluctuations in a security's price rather than on the magnitude of the price movement.96
Finally, "liquidity detection" has emerged as one of the most
controversial of these and other HFT strategies. In employing

this strategy, traders use algorithms to "attempt to identify and
profit from the actions of other large traders."96 By examining an
aggregate set of data points from multiple exchanges, these algorithms identify the existence of larger, hidden orders or traders attempting to enter or exit positions. For example, when a
small order is filled quickly (an "iceberg order"), algorithms
might infer that there is a large order behind it and base their
90 This list of strategies is not exhaustive but instead provides background regarding some of the most popular strategies.
91 See Andrew J. Keller, Note, Robocops: Regulating High Frequency Trading after
the Flash Crash of 2010, 73 Ohio St L J 1457, 1467 (2012).
92 See Cristina McEachern Gibbs, Breaking It Down : An Overview of High-
Frequency Trading (Wall Street & Technology, Sept 29, 2009), archived at
http://perma.cc/9DP5-3CLA.
93 See Michael Chlistalla, High-Frequency Trading: Better than Its Reputation? *3

(Deutsche Bank Research, Feb 7, 2011), archived at http://perma.cc/DCF3-BW5N.
94 See Gibbs, Breaking It Down (cited in note 92).
95 See id. For this strategy, it matters more that a security's price changes frequently; it is less important that a stock has increased or decreased in value from open to
close of trading.
96 Matt Prewitt, Note, High-Frequency Trading: Should Regulators Do More?, 19

Mich Telecomm & Tech L Rev 131, 135-36 (2012). Flash orders must still satisfy Regulation NMS, which requires that orders be offered at the National Best Bid and Offer
price - that is, at the best available ask price when buying and at the best available bid
price when selling. Securities and Exchange Commission, Regulation NMS, 70 Fed Reg
37496, 37501-02 (2005). See also Lawrence Harris and Ethan Namvar, The Economics of
Flash Orders and Trading *4 (Jan 15, 2011), archived at http://perma.cc/SN49-MHSB.
trading accordingly.97 Liquidity detection can also be based on

"flash orders": when an investor places an order and there are
no apparent sellers, the exchange might "flash" the order to cer-
tain traders.98 Potential sellers who receive the flash can see the
buy order and respond with their own order to execute against
and in competition with the flashed buy order; high-frequency
traders will beat slower investors to these trades and may reap
sizable profits.99
Proponents of HFT have highlighted several perceived advantages of these strategies. First and foremost is the opportunity to trade more shares more frequently: by exploiting marginal price differences (by the microsecond or nanosecond100),
traders can make profits of cents or even fractions of a cent on
each trade and still realize significant profits by the end of the
day due to the extremely fast pace and high volume of shares
traded. Additionally, HFT firms pay fees to purchase two distinct advantages from exchanges: co-location services, which allow traders to place their computer servers a few feet from each
exchange's servers; and increased speed of data transmission,
such that data released through securities information processors will reach HFT firms faster than it will reach conventional
computerized trading firms.101 As a result, HFT firms often receive data in as little as 1 microsecond, whereas it takes approximately 1,500 microseconds for the same data to reach a traditional computerized trader.102
However, HFT is certainly not without its critics. In general,
electronic trading requires traders to post a buy or sell order
that a computer then matches with a corresponding sell or buy
order on the other end of the trade. Provided that there is an
97 See Zhang, High- Frequency Trading at *9 (cited in note 88).

98 See Harris and Namvar, The Economics of Flash Orders at *2 (cited in note 96).
99 See Securities and Exchange Commission, Fact Sheet : Banning Marketable Flash
Orders (Sept 17, 2009), archived at http://perma.cc/6FNY-RUXG. When the SEC first
addressed flash orders in 2009, it estimated the length of the flash at "one second or
less." Id. Recent estimates hover in the range of 30 to 150 milliseconds. See Harris and
Namvar, The Economics of Flash Orders at *4 (cited in note 96).
100 A microsecond is one millionth (10 6) of a second; a nanosecond is one billionth
(10 9) of a second. By way of comparison, estimates of the time it takes to blink an eye
range from 100,000 to 400,000 microseconds; 1 microsecond is to 1 second as 1 second is
to 11.574 days. See Second Consolidated Amended Complaint for Violation of the Federal
Securities Laws, City of Providence v BATS Global Markets , Ine , Civil Action No 142811, *27 n 18 (SDNY filed Sept 2, 2014) (^'Providence Amended Complaint").
101 See Class Action Complaint, Lanier v BATS Exchange , Ine , Civil Action No 143745, *19-20 (SDNY filed May 23, 2014) (" Lanier Complaint").
102 See id at *20-24.
1 530 The University of Chicago Law Review [82 : 1 5 1 1
acceptable match, the trade is executed. By speeding up the

rates at which orders are posted and matched and by increasing
the volume of posted orders, HFT adds uncertainty to the traditional electronic-trading mechanism.103 Critics of HFT have emphasized the potential opportunities for fraud that these new
strategies introduce. Indeed, three types of fraud have been defined and generally accepted throughout the scholarship on
HFT: "stuffing," in which high-frequency traders submit "an
unwieldy number of orders" to congest the market and slow
market access for non-high-frequency traders; "smoking," in
which high-frequency traders post "alluring limit orders to attract slow traders" but then quickly reverse their orders "onto
less generous terms, hoping to execute profitably against the incoming flow of slow traders' market orders"; and "spoofing," in
which traders post and cancel orders to create a false appearance of market activity.104
Further, one recent study has argued that the speed of HFT
is in fact breaking down relationships between stocks and other
types of securities. For example, in a constantly moving market,
correlated financial products simply cannot move at exactly the
same time when time is measured in increments that are too
finely grained.105 Because the prices of correlated securities, such

as futures contracts and their underlying commodities, are so in-
tertwined and often predictive of each other, this breakdown

leads to an increased opportunity for arbitrage for whichever
firm is the fastest.106 Some scholars have advocated for slowing
down the speed of HFT and imposing regulatory "speed limits"
to help preserve these relationships;107 however, there have been
no such regulations to date.
B. The Impact of HFT on Market Efficiency
Independent of the debate regarding the perceived advantages and disadvantages of HFT, much current scholarship
focuses on the issue of market efficiency. Legal and economic
103 See Brown, Comment, 11 Appalachian J L at 218-19 (cited in note 85).
104 Bruno Biais and Paul Woolley, High Frequency Trading *8-9 (Mar 2011), ar-
chived at http://perma.cc/84AR-LQX8.
105 See Eric Budish, Peter Cramton, and John Shim, The High-Frequency Trading
Arms Race : Frequent Batch Auctions as a Market Design Response *12-13 (June 4, 2015),
archived at http://perma.cc/3SBL-4D63.
106 See id at *22.
107 See, for example, id at *52-54.
scholarship regarding HFT's impact on market efficiency is ex-
tensive and inconclusive. On one side of the debate are scholars
who believe that HFT adds to the efficiency of the market, or

even that HFT cannot operate without an efficient market such
that the presence of HFT is an indication of market efficiency.
As HFT increases the speed at which trades occur, it also speeds
up the valuation process that underlies the fraud-on-the-market
presumption.108 In this way, HFT can be seen as increasing informational efficiency by enabling traders to process relevant in-
formation faster.109 The algorithms that process market orders

from high-frequency traders will absorb not only publicly available information but also information about conventional trad-
ers' behavior faster than human traders will - resulting in a superior ability to predict price changes.110 Additional studies have
provided evidence that HFT can reduce adverse selection costs
(losses suffered by the buyer when a stock moves in the seller's
favor immediately after the trade, and vice versa), narrow
spreads between bid and ask prices, and increase the informational accuracy of price quotes - all of which may lead to increased efficiency in the marketplace.111 Indeed, at least one
scholar has suggested that these features of HFT can be used to
establish efficiency for the fraud-on-the-market presumption,
noting that the criteria necessary to satisfy the efficient- market
predicate should be "fairly easily met" given the "high-speed

[and] high-turnover" of stocks when using this strategy.112
Much of this scholarship is based on the determination that

the efficiency provided by HFT comes in the form of increased
liquidity in the marketplace.113 Because high-frequency traders
capitalize on gaps in trades (in terms of both timing and price),
they introduce additional liquidity to the market. By seizing on
the smallest of price discrepancies or time delays, HFT may help
reduce volatility and improve the market's overall efficiency.
One study of the effects of HFT on short-term price efficiency
108 See Part I.B.I.
109 See Biais and Woolley, High Frequency Trading at *14 (cited in note 104).
110 See id at *9.
111 See Terrence Hendershott, Charles M. Jones, and Albert J. Menkveld, Does Algorithmic Trading Improve Liquidity?, 66 J Fin 1, 3-4 (2011).
112 Yesha Yadav, Beyond Efficiency in Securities Regulation *51-54 (Vanderbilt
University Law School, Feb 24, 2014), archived at http://perma.cc/G32K-8DLW.

113 For example, one financial markets advisory group defines HFT as comprising
"fully automated trading strategies that seek to benefit from market liquidity imbal-
ances or other short-term pricing inefficiencies." Gibbs, Breaking It Down (cited in
note 92).
has shown that aggressive HFT activity "improves price efficiency in the NASDAQ market by trading in the direction of permanent price changes and in the opposite direction of transitory
pricing errors," which presumably normalizes prices over time.114
For example, arbitrage strategies that involve trading off of
price discrepancies across different exchanges may have the effect of normalizing the price for any given security across the
market nationwide.115 By trading on these inefficiencies and
providing price correction in this manner, HFT arguably helps
the market arrive at the proper price for the securities - thereby
enhancing market efficiency.
However, a seemingly equal amount of literature reaches

the opposite conclusion: that HFT instead introduces inefficiencies and errors into the market. In a recent speech, SEC
Chair Mary Jo White noted that HFT can "sometimes detract
from market quality, including the informational efficiency of

prices."116 The fast-paced nature of HFT pressures traders to
overvalue short-term information, which some scholars believe
hinders the market's ability to accurately incorporate news into
asset prices.117 The sheer volume of trades that occur when HFT
is introduced also leads to millions of price reversals in one day,
creating instability and volatility in pricing.118 In addition, high-
frequency traders add another middleman to each transaction

by purchasing and then quickly selling the securities - and, critics argue, unnecessarily raising prices in the process.119
Yet another argument against HFT's tendency to increase
efficiency relies on the effect that high-frequency traders have

on traditional investors. Several studies, as well as commentary
in Michael Lewis's influential book Flash Boys, suggest that
114 Staff of the Division of Trading and Markets, Equity Market Structure Literature
Review : Part II; High Frequency Trading *10 (SEC, Mar 18, 2014), archived at
http://perma.cc/9SFR-BKQM.
115 See note 91 and accompanying text.
116 Mary Jo White, Enhancing Our Equity Market Structure (SEC, June 5, 2014),
archived at http://perma.cc/B8U8-AC4H (speech to Sandler O'Neill & Partners, LP Global Exchange and Brokerage Conference).
117 See, for example, Kenneth A. Froot, David S. Scharfstein, and Jeremy C. Stein,
Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation , 47 J Fin 1461, 1481 (1992) (noting that short-term trading can have a "direct negative impact on the informational quality of asset prices").
118 See Zhang, High-Frequency Trading at *26 (cited in note 88) (suggesting that
HFT hinders price discovery as it "pushes stock prices too far in the direction of earnings
news, and, as a result, stock prices reverse in the subsequent months after the initial
reaction").
119 See Michael Lewis, Flash Boys: A Wall Street Revolt 110 (Norton 2014).
HFT harms traditional investors.120 In one study, a model that

assumed perfect liquidity and no spread between bid and ask
prices displayed an increase in market volatility on the introduction of HFT merely because of the increased speed of
trades.121 The "abnormal trading profits" afforded to highfrequency traders in this scenario come at the expense of ordinary traders and exacerbate market inefficiency.122
In sum, despite the disagreement over HFT's effect on mar-
ket efficiency, this debate coalesces around two major focal
points. First, there is intense disagreement regarding HFT's impact on volatility in the market. While scholars in the proefficiency camp believe that the speed of HFT normalizes prices
and decreases volatility over time,123 other studies suggest that
the higher number of price reversals instead increases volatility
and instability in prices.124 Second, scholars disagree about how
HFT absorbs information into share prices and whether this absorption increases or decreases efficiency. Pro-efficiency argu-
ments emphasize HFT's ability to incorporate information on
both the company and trading behavior into the market faster,126
while anti-efficiency arguments focus on HFT's overvaluation of

short-term information.126 To some extent, these differences like-
ly reflect divergence in scholars' underlying value judgments but they are presumably also the result of the vast uncertainty
still surrounding HFT today.
C. Current Legal Challenges to HFT

The SEC has yet to promulgate any formal rules on the subject of HFT or any HFT-specific regulations, but it did increase
its enforcement efforts after the Flash Crash of May 2010, when
the Dow Jones Industrial Average suffered its largest intraday
point loss - dropping 1,000 points in 5 minutes - and then recovered much of the loss just minutes later.127 While HFT is
120 Id at 171.
121 Robert A. Jarrow and Philip Protter, A Dysfunctional Role of High Frequency
Trading in Electronic Markets *2-4 (Johnson School Research Paper Series, Mar 2011),
archived at http://perma.cc/P5VE-DSEH.
122 Id at *12.
123
124
125
126
See
See
See
See
note 114 and

note 118 and
notes 109-10
note 117 and
accompanying text.
accompanying text.
and accompanying text.
accompanying text.
127 See Brian Korn and Bryan Y.M. Tham, Why We Could Easily Have Another
Flash Crash (Forbes, Aug 9, 2013), archived at http://perma.cc/84JP-ICAL9.
commonly blamed for causing the Flash Crash, some empirical

research has indicated that, rather than triggering these events,
HFT merely exacerbated preexisting price movement and market volatility.128
The SEC brought its first market manipulation case against

an HFT firm on October 16, 2014, sanctioning Athena Capital
Research for "marking the close" - that is, placing a large number of aggressive, rapid-fire trades in the final two seconds of
almost every trading day during a six-month period - to push
the closing prices of thousands of NASDAQ-listed stocks in the
firm's favor.129 Athena's allegedly manipulative trading made up
more than 70 percent of the total NASDAQ trading volume of
the affected stocks in the seconds preceding the market close.
The SEC argued that the firm's practices, including the use of
algorithms to ensure that the firm's orders received priority over
other orders that similarly traded on day-end price imbalances,

constituted a manipulative or deceptive device pursuant to Rule
10b-5.130 Athena ultimately "agreed to pay a $1 million penalty
and cease and desist from committing or causing any future vio-
lations of the securities laws."131
Currently, the majority of litigation regarding HFT is in

lawsuits against exchanges and alleges injury to traditional investors because of HFT. Many of these actions emerged after the
publication of Flash Boys; in some cases, the language in the
complaints seems largely cribbed from Lewis's book. The leading
case is City of Providence v BATS Global Markets, Ine,132 a currently pending class action brought on behalf of public investors
who traded on one of several registered public stock exchanges
128 See, for example, Andrei Kirilenko, et al, The Flash Crash: The Impact of High
Frequency Trading on an Electronic Market *18 (Sept 24, 2014), archived at

http://perma.cc/XT9P-WAH6. In addition, the DOJ recently brought criminal charges
against an individual high-frequency trader, Na vinder Singh Sarao, and his company for
their activities in connection with the Flash Crash. See Criminal Complaint, United
States of America v Sarao , Criminal Action No 15-75, *21-24 (ND 111 filed Feb 11, 2015).
The prosecutors in this case attributed "much of the blame" for the Flash Crash to Sarao.
Nathaniel Popper and Jenny Anderson, Trader Arrested in Manipulation that Contributed to 2010 Flash Crash' (NY Times, Apr 21, 2015), archived at http://perma.cc/CQZ4
-7QFV.
129 Securities and Exchange Commission, SEC Charges New York-Based High Frequency Trading Firm with Fraudulent Trading to Manipulate Closing Prices (Oct 16,
2014), archived at http://perma.cc/CN7J-AAXW.
130 Id.
131 Id.
132 Complaint for Violation of the Federal Securities Laws, Civil Action No 14-2811
(SDNY filed Apr 18, 2014) (" Providence Complaint").
as well as in Barclays Liquidity Cross, the Barclays dark

pool.133 The plaintiffs claim injury as a result of a course of
business whereby the defendant brokerage firms and securities
exchanges "employed devices, contrivances, manipulations and
artifices to defraud in a manner that was designed to and did
manipulate the U.S. securities markets and the trading of equities on those markets" in violation of 6(b) and 10(b) of the Exchange Act, among other provisions.134 The complaint highlights
manipulative, self-dealing, and deceptive conduct in connection
with the HFT strategies of electronic front running, rebate arbitrage, slow-market (or latency) arbitrage, spoofing, layering, and
contemporaneous trading.135 Similar to the theory underlying
the SEC's action against Athena Capital, the plaintiffs' central
claim is that the HFT strategies allowed on the exchanges constituted market manipulation and fraud and deceit in violation
of federal securities laws. This complaint was quickly followed
by at least three more parallel cases in the Southern District of
New York;136 at the writing of this Comment, the parties are
awaiting a ruling on the defendants' motion to dismiss.
Another suit, also brought against the BATS Exchange, is
distinct from City of Providence- type suits in that it relied entirely on state contract law and made a novel factual assertion
133 A "dark pool" is a private forum for trading securities in which traders do not reveal their identities and do not publicly display their transactions or the price at which
those transactions are conducted. Dark pools are operated by broker- dealers and are
regulated by the SEC and the Financial Industry Regulatory Authority. See Christopher
Mercurio, Dark Pool Regulation , 33 Rev Ban & Fin L 69, 69 (2013).
134 Providence Complaint at *1 (cited in note 132). Section 6(b) of the Exchange Act
outlines when an exchange may be registered as a national securities exchange. 15 USC
78f(b).
135 In "electronic front running," HFT firms utilize preferred access to material trade
data to identify and trade in front of large orders. "Rebate arbitrage" involves traders
deciding which exchange to trade on based on the rebate paid to them by the exchanges
for their trading. "Slow-market arbitrage," also known as "latency arbitrage," uses the
speed of HFT to gain advantages in arbitraging price discrepancies in a particular security that trades simultaneously on different markets (this is the strategy used in the introductory hypothetical at the beginning of this Comment). "Spoofing" and "layering" in-
volve inducing others to trade a security at a price not representative of actual supply
and demand. Finally, "contemporaneous trading" involves entering both sides of a transaction at the same time in an attempt to cut losses. Providence Complaint at *3-4 (cited
in note 132).
136 See generally Complaint for Violations of the Securities Laws, American European Insurance Co v BATS Global Markets, Ine , Civil Action No 14-3133 (SDNY filed May
2, 2014); Complaint for Violations of the Securities Laws, Harel Insurance Co v BATS
Global Markets, Ine , Civil Action No 14-3608 (SDNY filed May 20, 2014); Complaint for
Violation of the Federal Securities Laws, Flynn v Bank of America Corp , Civil Action No
14-4321 (SDNY filed June 13, 2014).
that read similarly to a common-law contracts claim. In Lanier v

BATS Exchange, Ine ,137 the lead plaintiff brought suit individually and on behalf of subscribers who entered into contracts to
receive electronic market data from the defendants.138 The com-
plaint alleged that the exchanges transmitted market data to

their HFT clients before they sent the same data to the securities information processor, which then aggregated the data and
sent it to non-HFT subscribers (the plaintiffs).139 Choosing to
base their claims on contract law rather than on federal securi-
ties laws, the plaintiffs alleged breach of contract, imposition of

a constructive trust, and unjust enrichment from subscription
fees and other fees from preferred data customers - fees that
were paid by HFT firms to the exchanges.140 The court dismissed
these claims, finding them preempted by a "comprehensive federal regulatory scheme."141 Similarly, a suit against the Chicago
Mercantile Exchange and the Chicago Board of Trade alleges
that both exchanges gave HFT firms advance access to order data in violation of the Commodities Exchange Act;142 this case is
awaiting decision on a motion to dismiss.
* * *
While several of these suits allege a fraud on the marketplace, none invokes the fraud-on-the-market presumption of reliance in seeking class certification. The presumption may be a
useful tool in bringing suit against high-frequency traders and
may even be useful in the event that high-frequency traders
begin to occupy the plaintiff classes of such actions as well.
However, the short-term nature of HFT in conjunction with the

complexity of its trading mechanisms creates interesting complications for this type of litigation, which are addressed in
Part III.
137 Class Action Complaint, Civil Action No 14-3745 (SDNY filed May 23, 2014)
(" Lanier Complaint").
138 Id at *5-6.
139 Id at *6-7.
140 Id at *31-35.
14i Opinion and Order, Lanier v BATS Exchange , Ine , Civil Action No 14-3745, *4
(SDNY filed Apr 28, 2015).
142 Class Action Complaint, Braman u CME Group , Ine , Civil Action No 14-2646,
*1-2 (ND 111 filed Apr 11, 2014).

III. HFT Tomorrow: Proposed Strategies and Solutions
HFT presents such unique strategies and introduces such

peculiar questions to existing law that it is time for a rvaluation of traditional securities-law claims in light of these developments. The SEC has called HFT "one of the most significant
market structure developments in recent years,"143 indicating
that traditional evaluations of the speed and frequency of trading and the openness of markets should be reassessed. A textual
comparison to the language of Basic itself indicates that this
transformation of trading strategies no longer justifies the continued application of that decision to securities class actions
without modifications that reflect the current state of securities

markets. Basic referred to the "modern securities markets" as
involving "millions of shares changing hands daily" and noted
that those modern markets differed from "the face-to-face trans-
actions contemplated by early fraud cases";144 today, HFT differs
in a similar magnitude from the "modern securities markets" of

1988. As such, it is time to reconsider the legal framework for
assessing these claims. This Part presents possible solutions for
some of the procedural problems identified above - including

proof of price impact and reliance146 - and proposes ways in
which the Basic-era requirements for securities-fraud class actions should be tailored or altered in light of HFT.
In addition, there is reason to believe that as HFT gains
traction in the market, an ever-increasing share of trades will be

completed via HFT. Indeed, from 2004 to 2010, HFT increased
from 13 percent of all foreign exchange trades to 30 percent
and, by 2011, "account [ed] for about 60 percent of the seven bil-
lion shares that change hands daily on United States stock

markets."146 Large institutional investors engaged in trading
for wealth-management purposes - including pension funds,
such as the Erica P. John Fund, that are often lead plaintiffs in
securities-fraud class actions - often do their trading on open
exchanges like the NYSE and NASDAQ, and several commentators have noted that HFT might work against these longer-term
investors while allowing traders who employ HFT strategies to
143 Staff of the Division of Trading and Markets, Literature Review at *4 (cited in
note 114).
144 Basic , 485 US at 243-44.

145 See Part I.B.I.
146 Tom C.W. Lin, The New Investor , 60 UCLA L Rev 678, 692 (2013) (quotation
marks omitted).

reap short-term benefits.*147 While pension funds are not generally involved in HFT, other institutional investors have started using certain services offered by HFT firms, which presents an ad-
ditional complication and yet another reason to reexamine these

issues.148 With the continued growth of HFT, eventually even
pension funds and other traditional, non-HFT institutional investors - who have important incentives to be activist investors
and act as a check on corporate governance issues - will not be
able to keep up with the pace of the market.149
Thus, courts deciding securities-fraud class actions will have

to resolve the problem of how the different manners and mecha-
nisms by which investors conduct trades affect their treatment

in litigation. Courts will also have to face the procedural difficulty of identifying precisely which high-frequency traders and
which HFT firms were present in the market to affect trading.
Further, there may eventually be situations in which plaintiff
classes of high-frequency traders seek to avail themselves qf the
securities laws. As there are currently no identifiable instances
of such cases, this will be a novel situation if and when such
plaintiffs come to court.
This discussion of HFT in litigation proceeds in two stages.
First, Part III .A proposes a litigation strategy for plaintiffs

bringing suit against high-frequency traders. After reviewing
determinations of market efficiency in light of Halliburton II,
Part III .A evaluates arguments macie by the City of Providence
plaintiffs and then puts forth a new litigation strategy based on
existing theories of market manipulation. Second, Part III.B
looks ahead to the day when investors that have acquired their
shares via HFT seek to bring actions against corporations as issuers for Rule 10b-5 violations involving fraudulent misrepresentationsr Part III.B then argues that, while high-frequency
traders may have standing to sue because of the characteristics
they share with short sellers, procedural difficulties in proving
typicality and loss causation will likely prevent these suits from
proceeding as class actions.
147 See, for example, Keller, Note, 73 Ohio St L J at 1468 (cited in note 91) (noting
that certain HFT strategies use "speed and volume to earn consistent gains to the detriment of other market participants, mainly large institutional investors"); Fabozzi,
Focardi, and Jonas, 19 Rev Fut Mkts at 34 (cited in note 84).
148 See Prewitt, Note, 19 Mich Telecomm & Tech L Rev at 134 (cited m note 96).
149 See Charles R. Korsmo, High-Frequency Trading: A Regulatory Strategy , 48 U
Richmond L Rev 523, 560 (2014) (noting the fear that large non-HFT institutional investors will not be able to keep pace with the "heavy artillery" of HFT firms).
A. Bringing Suit against High- Frequency Traders

The current perception of high-frequency traders, based on
books like Flash Boys, paints these traders as villains seeking to
manipulate the market for their own benefit. As such, lawsuits
have been brought against, rather than by, such traders, and
plaintiffs have often sought recourse under 10(b). Both misrepresentation claims and market manipulation claims under Rule
10b-5, however, require a showing of reliance.150 Consequently,
plaintiffs in a FRCP 23(b)(3) class action will have to invoke the
fraud-on-the-market presumption of reliance to certify their
class, which includes a showing of market efficiency. If the
fraud-on-the-market presumption is not available, plaintiffs will
have to seek alternative forms of recovery, including but not lim-
ited to individual damages actions.

This Section addresses these issues in turn, beginning with
Halliburton ITs likely effect on showings of market efficiency
and next discussing the arguments raised by the parties in City
of Providence. Finally, this Section reconsiders existing theories
of market manipulation in light of HFT and proposes both a hybrid misrepresentation/manipulation theory, to which the fraud-
on-the-market presumption would apply, as well as the resurgence of open-market manipulation as a theory of liability.
1. Satisfying the market-efficiency predicate.
While the issue of market efficiency vis--vis HFT initially

seems problematic, it is likely that after Halliburton II defendants will retreat from arguments about market efficiency and
instead focus on questions regarding price impact and loss causation.151 Because evaluating (let alone proving) market efficiency is an arduous task, defendants seem more likely to avoid this
point and instead devote their efforts to introducing price-impact
evidence to rebut the fraud-on-the-market presumption.152 The

Cammer court noted that the term "developed markets" generally refers to "large impersonal, actively traded markets."153 These
150 See notes 8 and 10, and accompanying text.
151 See Part I.B.3.
152 See Comolli and Starykh, Recent Trends at *1 (cited in note 82) (noting that defendants in the three ost-Halliburton II securities class actions to date all introduced
arguments about price impact).
153 Cammer , 711 F Supp at 1277, quoting Jeffrey E. Fleming, Securities Fraud Third Circuit Adopts Fraud-on-the-Market Theory of Causation in 10b-5 Actions , 32 Vili
L Rev 913, 936 n 85 (1987).
characteristics intensify as markets with HFT become larger (as

the volume of trading increases), more impersonal (as algorithms do more work), and more actively traded (as more trades
occur) than markets without HFT. Recognizing these changes,
defendants might devote fewer resources to challenging findings
of market efficiency.
Further, it can be argued that HFT, so long as it occurs on

national exchanges, does not affect market efficiency. Because "a
large percentage of activity on NASDAQ"164 can be classified as
HFT, there might still be a presumption that the market is efficient notwithstanding the introduction of HFT. As previously
discussed, some courts have already recognized that large na-
tional markets like NASDAQ are entitled to a presumption of
efficiency.155
Additional arguments can be made to support this shift in

defense strategy based on the Supreme Court's language in earlier cases. Some scholars argue that Basic did not require a formal definition of "efficiency" and that the Court "did not find it
necessary to set forth a rigorous test for market efficiency," be-
cause it pragmatically recognized the difficulty of assuming

this task.156 In acknowledging that the Exchange Act is premised on "a philosophy of full disclosure,"157 the Court has previously noted that it "need only believe that market professionals
generally consider most publicly announced material statements
about companies" to find the efficiency predicate satisfied.158
A distinguished group of law professors and former SEC

officials writing as amici in Halliburton II agreed with this
viewpoint, arguing that the efficient-markets hypothesis "was

never designed to prove causation or reliance in securities cases,
or to be applied by judges and juries."159 Indeed, these amici noted that forcing courts to make determinations of market efficiency has resulted in exactly the confusion that Justice Byron
154 Staff of the Division of Trading and Markets, Literature Review at *13 (cited in
note 114). Empirical studies have shown that HFT firms had trade-participation rates of
68.3 percent dollar volume, and that the HFT percentage of aggressive sides (the sides
that traded immediately) and passive sides (the sides resting on an order when an aggressive order arrived) were 42.2 percent and 41.2 percent, respectively. See id.
155 See notes 59-60 and accompanying text. See also, for example, In re DVI, 639
F3d at 634 (noting that the listing of a security on a major exchange weighs in favor of a
finding of market efficiency).
156 Black, 44 Loyola U Chi L J at 1501-04 (cited in note 28).

157 Basic, 485 US at 230 (quotation marks omitted).
158 Id at 246 n 24.
159 Law Professors' Brief at *6 (cited in note 50).
White foretold in Basic: "traditional legal analysis [has been] replaced with economic theorization by the federal courts."160 With
HFT's entry into the market, determinations of market efficiency will become more difficult and more rooted in economic theo-
ry - lending credence to White's concerns.161 Some non-HFT defendants in pre-Halliburton II cases conceded market efficiency
for the securities at issue;162 parties may similarly resort to stip-
ulations of market efficiency in HFT cases to avoid the problem

altogether.
Of course, some litigants may see market efficiency as the
easier argument and choose to focus on this predicate rather
than employ experts to provide event studies that show an absence of price impact. Due to the lack of consensus from economic commentators, this is another potentially viable strategy - but
it may turn out to be undesirable in the future if and when highfrequency traders seek to bring suits as plaintiffs and need to
prove market efficiency themselves. Because HFT adds volatility
to the market and forces an overvaluation of short-term infor-
mation that raises costs for traditional investors, courts may

identify factors other than available information that can shape
prices. Indeed, yet another possibility is that HFT defendants
will prefer to settle actions to avoid disclosing their proprietary
HFT strategies through discovery - public knowledge of which
would erase any advantage that they had in the market.163 While
efficiency will undoubtedly remain a contentious issue, it remains to be seen how prevalent these debates will be in litiga-
tion after Halliburton II.
160 Id at *7, citing Basic , 485 US at 252 (White dissenting).

161 For a discussion of the competing economic theories at play, see Part II. B.
162 See, for example, Amgen Ine v Connecticut Retirement Plans and Trust Funds ,
133 SCt 1184, 1190 (2013).
163 For an illustration of how valuable these algorithms are, see United States v
Aleynikov , 737 F Supp 2d 173, 175 (SDNY 2010). Sergey Aleynikov, a former programmer at Goldman Sachs, was convicted of stealing and transferring some of the source
code for Goldman Sachs's HFT systems upon his departure from the firm. Goldman
Sachs originally acquired these systems in 1999 for approximately $500 million. Id.
Aleynikov was given a sentence that initially included ninety- seven months' imprisonment followed by a three-year supervised release, as well as a $12,500 fine; this sentence
was later reversed. United States v Aleynikov , 676 F3d 71, 73-75 (2d Cir 2012). A second
conviction was filed in state court on similar grounds and recently overturned. See Decision and Order, People v Aleynikov , No 4447, *2 (NY Sup filed July 6, 2015).

2. Arguments from the City of Providence litigants.
There are currently a handful of suits pending against national securities exchanges alleging violations of the federal securities laws based on the presence of HFT in those markets.164
Unfortunately, the initial briefing from City of Providence, the
largest of these cases, did not elaborate on how the reliance requirement in Rule 10b-5 or the fraud-on-the- market presumption might apply to HFT cases. Rather than invoke a presumption of reliance, the plaintiffs instead argued that class members
"relied on the integrity of the market" in trading on the public
exchanges run by the defendants; essentially, the exchanges'
statements regarding their integrity were the allegedly actionable misrepresentations under Rule 10b-5.165 Perhaps in an attempt to dissuade the court from invoking fraud on the market
sua sponte, the defendants noted that the presumption was inapplicable because the plaintiffs did not plead the existence of
an efficient market for a specific security as Basic requires.166
In support of their motion to dismiss, the defendants presented several additional arguments to rebut allegations of mis-
representations, which provide insight into how future plaintiffs

might tailor their claims to allow application of the fraud-on-the-
market presumption. First, the defendants argued that the institutional investors lacked standing to assert a Rule 10b-5
claim because the complaint "[did] not identify any specific purchase or sale of any specific security."167 Because the Second Circuit has previously rejected the notion that anyone who merely
makes use of the markets has standing to bring a Rule 10b-5
claim,168 the defendants argued that specific transactions of specific securities must be noted in the complaint.169 Although the
court's decision is still pending at the time of this writing, future
plaintiffs can avoid this attack by pointing to specific trades as a
basis for their alleged losses. For example, showing the presence
164 See notes 132-42 and accompanying text.
165 Providence Amended Complaint at *136 (cited in note 100).
166 Memorandum of Law in Support of Exchange Defendants' Motion to Dismiss

the Consolidated Amended Complaint pursuant to Federal Rules of Civil Procedure
12(b)(1) and 12(b)(6), City of Providence v BATS Global Markets, Ine , Civil Action No
14-2811, *46-47 (SDNY filed Nov 3, 2014) ("Defendants' MTD Memo"), citing Basic ,
485 US at 247.
167 Defendants' MTD Memo at *37 (cited in note 166).

168 See Ontario Public Services Employees Union Pension Trust Fund v Nortel Networks Corp , 369 F3d 27, 32, 34 (2d Cir 2004).
169 Defendants' MTD Memo at *37 (cited in note 166).
of high-frequency traders in the market for the particular security in which the plaintiffs traded would point to a specific
transaction and would help plaintiffs demonstrate standing to
bring their claims.
Second, the defendants argued that the complaint did not
adequately identify fraudulent statements that were false and
misleading to investors.170 In the defendants' view, the closest
the plaintiffs came to identifying a specific statement as mis-
leading was in their allegations that the exchanges sought to
maintain "fair and orderly" markets and provide investors with

equal access to markets and information.171 However, the Second
Circuit has previously established that "general statements
about reputation, integrity, and compliance with ethical norms

are inactionable," as they are "too general to cause a reasonable
investor to rely upon them."172 Again, while the court's evaluation of these arguments is still forthcoming, future plaintiffs
may be better served by looking to misrepresentations made
by actual HFT firms themselves regarding the firms' trading
behavior.
Separately, an interesting exception to the generally inactionable nature of statements regarding the integrity of the
marketplace arises with alleged misrepresentations about a
firm's dark pool. For example, in an action against the Barclays
dark pool, the plaintiffs based their claims on Barclays's description of its dark pool as a "safe haven" for investors, insulated from aggressive and predatory HFT practices.173 The
plaintiffs alleged that, contrary to this statement, Barclays actively courted HFT firms for the dark pool and provided them
with material nonpublic information, giving them an unfair advantage over other traders.174 This suit was eventually consolidated with City of Providence.115
Third, the City of Providence defendants countered claims of

Rule 10b-5 market manipulation by arguing that the plaintiffs
failed to properly allege that the exchanges engaged in conduct
with the specific purpose of affecting the market price of any
170 Id at *43-46 (cited in note 166).
171 Providence Amended Complaint at *37, 41 (cited in note 100).
172 City of Pontiac Policemen's and Firemen's Retirement System v UBS AG, 752 F3d
173, 183 (2d Cir 2014).
173 In re: Barclays Liquidity Cross and High Frequency Trading Litigation , 2014 WL
7180624, *1 (JPML) (consolidated on Dec 12, 2014).
174 Id.
175 Id at *1-2.
security.176 The defendants made a similar argument regarding

the plaintiffs' failure to adequately prove loss causation, as there
was no identification of "what loss they incurred in trading on
what security on which [ejxchange at what time."111 Had the
plaintiffs chosen to include HFT firms as defendants in addition
to the exchanges, there would perhaps have been valuable market manipulation claims; however, the plaintiffs would still have
needed to prove that the defendants acted for the express purpose of changing the market price of a particular stock.178 These
shortcomings lead to a corresponding difficulty in proving reliance for a Rule 10b-5 claim, as it is not clear what misrepresentation or manipulative act the plaintiffs relied on. The plaintiffs
did not assert any 9 claims of market manipulation, likely because they did not want to bear the burden of proving specific
intent.
3. Market manipulation reconsidered in light of HFT.

Plaintiffs bringing suits against high-frequency traders and
HFT firms may find greater success in combining the various
theories of liability for market manipulation. HFT plaintiffs
might be well equipped to bring a hybrid strategy combining elements of open-market manipulation with the fraud-on-themarket presumption of reliance. Such a strategy would enable
plaintiffs to avoid the more stringent intent requirements of 9,
while also avoiding potentially difficult reliance issues. Courts

tend to interpret fraud on the market as a variation of a misrepresentation case rather than as a market manipulation case.179
However, there appears to be some gray area between these two
doctrines that would allow the extension of the presumption to
claims against high-frequency traders based on their allegedly
manipulative behaviors.
176 Defendants' MTD Memo at *40-41 (cited in note 166).

177 Id at *47 (emphasis in original).
178 See ATSI Communications, lne v Shaar Fund, Ltd , 493 F3d 87, 101 (2d Cir
2007). Various HFT firms were initially included as defendants in the original complaint
but were removed in the Second Consolidated Amended Complaint. One possible reason
for this removal might be that the plaintiffs found it difficult to identify the firms actual-
ly engaging in the HFT that caused the alleged injury; such practical difficulties will
need to be addressed if this type of litigation is to succeed.
179 See, for example, Desai v Deutsche Bank Securities, Ltd, 573 F3d 931, 945 (9th
Cir 2009) (O'Scannlain concurring) ("It is true that the fraud on the market theory is
normally phrased in terms of misrepresentations or omissions."). See also Black, 52
Albany L Rev at 939 (cited in note 9).
The fraud-on-the-market presumption is often unavailable

to plaintiffs making market manipulation claims,180 likely because one of the requirements for bringing a Rule 10b-5 manipulation claim is "an assumption of an efficient market free of manipulation."181 However, in certain situations some courts have
held otherwise. For example, the pre-Basic case Chemetron Corp
v Business Funds, Ine 182 held that when a 10(b) claim involves
market manipulation conducted via fraudulent misstatements,
the plaintiff must still establish reliance and can do so via a presumption of reliance.183 The plaintiffs in Chemetron alleged a
"plan, scheme, or conspiracy to manipulate the price of [the defendant company's] stock through actual or apparent trading,
thereby inducing transactions by others."184 A more recent district court decision, Scone Investments, LP v American Third
Market Corp,185 also found the fraud-on-the-market presumption
"especially applicable in the market manipulation context" when

such schemes intentionally distort the price of a security.186 The
manipulative behavior at issue in Scone Investments was also a
series of trades designed to "inflate the price of the designated
securities by creating the appearance of demand."187 Additionally, one scholar has argued that the fraud-on-the-market presumption should be extended to market manipulation claims,
reasoning that such plaintiffs should not be required to
demonstrate the existence of an efficient market to benefit
from the presumption, and rather should have to show only
loss causation.188
As such, misrepresentations about trading activities and

misleading trades themselves could give rise to Rule 10b-5
180 See, for example, Desai , 573 F3d at 942 (finding that the district court did not
abuse its discretion in declining to apply the fraud-on-the-market presumption in a market manipulation case).
181 ATSI Communications , 493 F3d at 101. See also text accompanying note 10.
182 718 F2d 725 (5th Cir 1983).
183 Id at 728. See also Black, 52 Albany L Rev at 950-51 (cited in note 9). Note that
Chemetron has no precedential force because the original panel action was vacated and
remanded by the Supreme Court; on remand, the panel opinion was ordered for rehearing en banc and vacated. See Chemetron , 718 F2d at 730.
184 Chemetron Corp v Business Funds , Ine , 682 F2d 1149, 1155 (5th Cir 1982).
185 1998 WL 205338 (SDNY).
18 Id at *4.
187 Id at *1.
188 See Korsmo, 52 Wm & Mary L Rev at 1171-76 (cited in note 4). Because the
efficient-market predicate of the fraud-on-the-market presumption would technically
require the absence of manipulation, requiring proof of efficiency from plaintiffs seeking
to bring such claims would make their cases impossible. See id at 1162-63.
actions. Even HFT firms' statements about the impact that
their behavior has on the market could lead to actionable mis-
representations. Indeed, courts and scholars have argued that a

presumption of reliance should apply to misstatements about
how specific trades are executed as well as to misstatements affecting the prices of specific securities.189 For example, one large
HFT firm touts itself as "lower [ing] costs for both retail and in-
stitutional investors by supplying competitive bids and offers,

without seeking to take on risky directional positions."190 HFT
firms might face difficulties if such statements turn out to be
false or misleading. Premising reliance on misstatements about
a market for securities would shift plaintiffs away from the nar-
row pleading requirements of 9 manipulation and over to

10(b) misrepresentations, allowing access to the Basic presumption as well.
In addition, suits against HFT firms provide the ideal set-
ting for resurgence of the open-market manipulation theory. Ag-
gressive HFT strategies appear to convey exactly the false impression of supply and demand that open- market manipulation
typically requires.191 The strategies of smoking and spoofing both
involve high-frequency traders deliberately posting orders to the
market that they have no intention of fulfilling, just to attract

slower traders. High-frequency traders then either rapidly reverse their orders onto less-generous terms (smoking) or repeatedly post and cancel their orders (spoofing) to create a false appearance of market activity.192 Such behaviors appear to be
precisely the form of manipulative trading anticipated by 9
and 10(b), as they have the "purpose of artificially depressing or
inflating the price of the security" through facially legitimate
transactions.193
These strategies also satisfy the Second Circuit's requirements for an open-market manipulation claim: profit or personal gain to the alleged manipulator, deceptive intent, market
189 See, for example, Stanislav Dolgopolov, A Two-Sided Loyalty?: Exploring the
Boundaries of Fiduciary Duties of Market Makers , 12 UC Davis Bus L J 31, 61 (2011),
quoting In re NYSE Specialists Securities Litigation , 405 F Supp 2d 281, 318-19 (SDNY
2005) ("Just as information about a specific security is reflected in the price of that secu-
rity, so too is information about the manner in which transactions would be completed
reflected in the price of securities generally.").
190 Company Overview (Virtu Financial, 2015), archived at http://perma.cc/2FVJ

-RGFB.
191 See notes 12-19 and accompanying text.

193 ATSI Communications y 493 F3d at 100-01.
domination, and economic reasonableness of the alleged transaction.194 Note the marked absence of a reliance requirement.
The market- domination factor may at first seem troublesome for
HFT due to the extremely short length of time for which traders
hold shares; however, because the Second Circuit makes this de-
termination by looking to the total percentage of a security's

trades that is carried out by any one actor rather than the trader's longer-lasting position, the behavior of HFT firms is likely to
fall within this category.196 Recall that in the SEC's enforcement
action against Athena Capital, for example, Athena's manipulative trading made up more than 70 percent of the total NASDAQ
trading volume of the affected stocks in the seconds preceding
the market close.196 Such a high percentage would undoubtedly
satisfy the Second Circuit's threshold for market domination
when viewed in the appropriate window of time.197
Another challenge is that market manipulation claims are
typically moot when the conduct at issue has been "disclosed to
the market."198 However, because HFT strategies are proprietary
and very closely guarded, they likely do not run afoul of this requirement. If plaintiffs are able to plead such claims with particularity, presumably by identifying the specific firms and
trades that caused the alleged injury, they might find courts
sympathetic to expanding Rule 10b-5 liability to open-market
manipulation and might additionally find relief under 9. Importantly, for claims of either open-market manipulation under
10(b) or market manipulation under 9, plaintiffs would not
have to prove reliance. Plaintiffs would therefore have an alternative route to recovery, should the fraud-on-the-market presumption be inapplicable.
194 See United States v Mulheren , 938 F2d 364, 370-72 (2d Cir 1991). See also notes
12-19 and accompanying text.
195 See Mulheren , 938 F2d at 371.
196 See SEC Charges New York-Based High Frequency Trading Firm (cited in note
129). See also notes 129-31 and accompanying text.
197 In Mulheren , the Second Circuit compared and discussed different percentages of
trading that would satisfy the domination requirement: 50 percent over a one-year period, 28.8 percent of daily exchange volume, and 83 percent in the final three hours of
trading. All of these examples resulted in a finding of market domination and manipulation by the defendants. See Mulheren , 938 F2d at 371-72.
198 In re Merrill Lynch Auction Rate Securities Litigation , 704 F Supp 2d 378,
390 (SDNY 2010) ("The market is not misled when a transaction's terms are fully
disclosed.").
B. High-Frequency Traders as Plaintiffs in Securities Class

Actions
With high-frequency traders occupying an ever-increasing

share of the market, courts may eventually have to confront the
question of these traders' legal recourse under the Exchange
Act. As with any new technology, what at first seems unfair and
deceptive may later become commonplace. For example, when
electronic trading first entered the market, Cantor Fitzgerald,
LP v Cantor 199 arose as a challenge to these new technologies.
In that case, a leading interdealer brokerage firm brought suit
against a competitor based on the competitor's development of
a new electronic trading system.200 The court acknowledged
that "the electronic trading of securities [was] 'the wave of the
future' and that the whole industry [was] moving in that direction"201 and accordingly denied the plaintiffs' request for a preliminary injunction - allowing the technology to enter the market.202 Seventeen years removed from this case, pit trading is
now "fast fading into history as the trading of stocks" becomes
electronic.203
At the time of this writing, virtually no commentators have

discussed whether high-frequency traders may have access to a
private right of action.204 While these traders may not be the
most "sympathetic plaintiffs,"206 they may suffer losses in the
same way that traditional traders do. For example, because
high-frequency traders often close out their positions at the end

of the trading day, a misrepresentation that negatively affects
the share price of a security may force traders to incur greater
losses in selling their positions at the end of the day.206 The

i" 724 A2d 571 (Del Chanc 1998).
200 Id at 575.
201 Id at 579 n 21.
202 Id at 589.
203 See Jerry W. Markham and Daniel J. Harty, For Whom the Bell Tolls : The Demise of Exchange Trading Floors and the Growth of ECNs, 33 J Corp L 865, 866 (2008).
204 But see Stanislav Dolgopolov, Providing Liquidity in a High-Frequency World:

Trading Obligations and Privileges of Market Makers and a Private Right of Action , 7
Brooklyn J Corp Fin & Comm L 303, 351 (2013) (contemplating the possibility of highfrequency traders using a private right of action).
205 Id.
206 See 75 Fed Reg at 3606 (cited in note 89) (noting that high-frequency traders aim
to end each "trading day in as close to a flat position as possible (that is, not carrying
significant, unhedged positions overnight)").
treatment of suits seeking recovery for losses of this type is

ripe for consideration because the unique characteristics of
HFT pose many problems regarding standing, reliance, and
class certification should investors continue to use the existing
framework for recovery. This Section argues that, by virtue of
comparison to short sellers, high-frequency traders have standing to bring suit under the securities laws. However, due to procedural complications in meeting class-certification requirements and proving the fraud-on-the-market predicates, it is
unlikely that the Basic presumption would apply to a plaintiff
class of high-frequency traders, and these suits are therefore unlikely to move forward. Consequently, the growth of HFT may be
a boon for would-be defendants in securities-fraud class actions:
due to typicality and predominance issues, the presence of highfrequency traders in a plaintiff class may bar class certification
in certain situations.
1. High-frequency traders will have difficulty meeting the

requirements of FRCP 23.
As a threshold matter, the class-certification requirements of
FRCP 23 raise the question whether investors who purchased their
shares via HFT can participate as class members in securitiesfraud class actions with conventional computerized traders as
the lead plaintiffs. The typicality and adequacy prongs of FRCP
23(a)207 and the predominance requirement of FRCP 23(b)(3)208
present barriers for such plaintiffs.
The typicality and adequacy prongs require that "[e]ach

plaintiff, in an individual suit, would be seeking to prove facts
that would entitle the others to recover."209 This requirement
presents problems for high-frequency traders serving as lead
plaintiffs in a securities-fraud class action due to their unique
reliance issues compared with those of conventional traders in
the putative class. Indeed, courts have previously rejected individuals with characteristics similar to high-frequency traders as
207 FRCP 23(a)(3) ("One or more members of a class may sue or be sued as representative parties on behalf of all members only if . . . the claims or defenses of the representative parties are typical of the claims or defenses of the class.").
208 FRCP 23(b)(3) ("A class action may be maintained if . . . the court finds that the
questions of law or fact common to class members predominate over any questions affecting only individual members.").
209 Kermit Roosevelt III, Defeating Class Certification in Securities Fraud Actions ,
22 Rev Litig 405, 410 (2003).
lead plaintiffs on reliance grounds. These courts have noted that

a high frequency of trades can "raise a unique defense regarding
lack of reliance on material misstatements and omissions,"210
and that a record of a high frequency and high volume of trades
can "raise serious concerns" about a lead plaintiffs typicality

and "his susceptibility to the defense that he was trading in response to information other than the alleged misstatements and
omissions" of the defendant.211 Class certification with an atypical lead plaintiff is denied when "there is a danger that absent
class members will suffer if their representative is preoccupied
with defenses unique to it."212 Consequently, a court may reject a
high-frequency trader as lead plaintiff for a class of traditional

investors due to the unique defenses that might be relevant to
high-frequency traders.
Despite difficulties in acting as lead plaintiffs, highfrequency traders may still be able to participate in a class.
There is evidence that high-frequency traders typically compete
against other high-frequency traders rather than against longterm investors;213 this finding may imply that a class could be
certified if it were a class of only high-frequency traders, rather

than a mixed class of investors. Courts have recognized that conflicts of interest between different groups of plaintiffs do not impact the fitness of the plaintiffs generally and will often permit
the construction of subclasses to resolve such conflicts.214 This
practice is common in traditional securities-fraud class action

litigation, wherein purchasers of different types of stock are of-
ten separated into distinct classes.215 So long as each subclass is

"homogeneous, in the sense that every member of the subclass
wants the same relief, and each subclass otherwise satisfies the
210 Bang v Acura Pharmaceuticals, Ine , 2011 WL 91099, *4 (ND 111).
211 Applestein v Medivation, Ine , 2010 WL 3749406, *3 (ND Cal). Note that Bang
and Applestein do not use the term "high frequency" in the technical sense of HFT, but
rather refer to a high volume of computerized trades with little time between each trade.
212 Hanon v Dataproducts Corp , 976 F2d 497, 508 (9th Cir 1992), quoting Gary Plastic Packaging Corp v Merrill Lynch, Pierce, Fenner & Smith, Ine , 903 F2d 176, 180 (2d
Cir 1990). See also In re Cavanaugh , 306 F3d 726, 729-30, 741 (9th Cir 2002) (Wallace
concurring) (noting that a party may be rejected as lead plaintiff if it is "subject to
unique defenses that render such plaintiff incapable of adequately representing the
class").
213 See, for example, Brown, Comment, 11 Appalachian J L at 220 (cited in note 85).
214 See, for example, In re Cendant Corp Litigation , 264 F3d 201, 244 n 25 (3d Cir
2001).
215 See, for example, Billitteri v Securities America, Ine , 2011 WL 3586217, *2, 16
(ND Tex) (approving a settlement agreement involving multiple classes of investors

based on which entity they invested in and whether they had commenced arbitration).
requirements for certifying a class, so that each could be the

plaintiff class in a separate class action," there is no problem
bringing the case as a single class action. Indeed, this can often
be the "superior approach."216 Future plaintiffs may be able to
use this strategy to create subclasses of high-frequency traders - or even subclasses of high-frequency traders who have used
different trading strategies - to advance their cases past the
class-certification stage.
2. High-frequency traders will have difficulty proving loss
causation.
Even in class actions in which the plaintiff class is entirely

made up of high-frequency traders, HFT plaintiffs will have difficulties proving loss causation due to the extremely short-term
nature of HFT positions. Because it is rare for traders or firms to
hold positions overnight,217 it may be difficult to trace losses back
to a particular misrepresentation or cause. Indeed, the fact that
high-frequency traders hold their stock for only fractions of a
second may make them ineligible for damages in the first place,
as the loss experienced may not have had anything to do with a
misrepresentation.218 It will be even harder to compose a certifiable class of traders to serve as plaintiffs if each trade occurred
at a different time and took different information into account.
Evaluating plaintiffs' claims of loss causation based on a specific

misrepresentation or statement will require a careful examination of the timing of the trades vis--vis the statements; if a pur-
chaser sold his shares quickly, before the truth emerged, the
misrepresentation would not have resulted in a loss.219 But if the
purchaser sold "after the truth [made] its way into the marketplace, an initially inflated purchase price might mean a later
loss."220 Evaluating such a trader's claims will involve close
scrutiny of his trading records and extensive event studies to
show loss causation, rendering classwide analysis exceedingly
difficult.
216 Johnson v Meriter Health Services Employee Retirement Plan , 702 F3d 364, 368
(7th Cir 2012).
218 See Bang , 2011 WL 91099 at *6 (noting that day traders and market makers
with high trading volumes often trade "based on minor price fluctuations and [do] not
necessarily rely on company statements" or misstatements).
219 See Dura Pharmaceuticals, Ine v Broudo , 544 US 336, 342 (2005).
220 Id (emphasis in original).
Consequently, proving loss causation may seem futile for

HFT plaintiffs: due to their large exposure and short holding
times, it might not be feasible for high-frequency traders to
prove losses. However, as Halliburton II emphasized that loss
causation does not need to be proven or decided at the classcertification stage, these concerns may not impede litigation at
the outset. Litigants have typically relied on expert witnesses
and their event studies and linear regressions to "tease apart
the various competing causes of observed market moves" to
prove loss causation.221 With the introduction of HFT into the
market, responses to misrepresentations and other material information often become "distinctly nonlinear,"222 leaving room in
this space for new models and methods for conducting damages
calculations. Over time, new damages models further developing
and describing these effects may emerge in financial and economic literature to help plaintiffs show loss causation at the
merits stage of their cases. Such models may be able to more accurately account for how HFT firms process market information
and to better quantify the magnitude of these firms' advantages.
Additionally, discovery after class certification may reveal more
information about specific trades such as the length of time that
shares were held and the exchanges on which the shares were
purchased, which will similarly assist the plaintiffs in proving
loss causation.
3. High-frequency traders may have standing, but reliance

is still problematic.
Because of the extremely short nature of HFT positions,

traders using these strategies could argue for analogous treatment of high-frequency traders and short sellrs. This comparison would confer standing on high-frequency traders in spite of
their rapid-fire trades, but it would also require proof of actual
reliance - making a class action with high-frequency traders as
the plaintiffs difficult to maintain. As such, while procedural issues may make class certification difficult, high-frequency traders may still have standing to sue as individuals.
Short sellers are investors who sell shares of stock they do
not own, in anticipation that the price will decline, and then use
221 Zachary Ziliak, Pa vitra Kumar, and Torben Voetmann, Key Complexities in
High-Frequency Trading Litigation (Law360, June 27, 2014), archived at
http://perma.cc/PJ7X-7T3F.
222 Id.
the proceeds of the short sale to repurchase the shares at a later date.223 When short sellers bring suit against a corporation
under Rule 10b-5, they typically argue that, due to the corporation's fraudulent misrepresentation, they were forced to buy additional shares to cover their short sale - shares that they would
not otherwise have needed or wanted to buy. This was precisely
the argument raised in Zlotnick v TIE Communications ,224 In
that case, the plaintiff executed a short sale of one thousand
shares of the defendant corporation's stock because he believed
the stock was overvalued. Subsequent to that sale, the defendants allegedly made misrepresentations that artificially inflated
the share price, including misrepresentations in press releases
about earnings forecasts and sales agreements. The plaintiff was
unaware of any deceptive practice and decided to make the purchases to cover his short position and cut his losses; he ended up
suffering losses of approximately $35,000.225 In analyzing the
timing of the plaintiffs trades, the court found that "this investment, like most investments, involve [d] two transactions"
and the fact that "the sale occur [red] 'before' the purchase [did]
not affect [the court's] consideration of each separate transaction
for the possible effects of fraud."226 The covering purchase was an
indicator that the trader had relied on the corporation's misrepresentation to his detriment.
High-frequency traders can make a similar argument if a

misrepresentation hits the market, causing a drop in a stock or
group of stocks. Traders might then be left owning shares of
stocks that they do not want to own, selling these shares at the
close of trading for losses that are small in each individual trade
but perhaps large enough in the aggregate to warrant a class action. Because high-frequency traders hold positions for such
short periods of time and often purposefully buy and sell to take
advantage of spreads in the market, they display many characteristics indicative of short selling. High-frequency traders can
223 See Zlotnick v TIE Communications , 836 F2d 818, 820 (3d Cir 1988).
224 8 36 F2d 818 (3d Cir 1988).
225 Id at 819.
226 Id at 821. See also Ganesh, LLC v Computer Learning Centers, Ine , 183 FRD 487,
490 (ED Va 1998) ("[T]he fact that the sale occurs before the purchase does not obviate
the fact that the holder of the short position is both a 'purchaser' and a 'seller' of the security. Both transactions are in need of protection from fraud, and they equally satisfy
the requirements for standing.") (citations omitted). For an explanation of the standing
requirements under the Exchange Act, see Blue Chip Stamps v Manor Drug Stores , 421
US 723, 750-55 (1975).
be thought of as less extreme versions of short sellers: whereas

short sellers sell before they even hold the underlying security,
high-frequency traders get as close to this line as possible
without crossing it. As such, if short sellers have standing to
bring Rule 10b-5 claims, surely high-frequency traders have
standing as well, given that they actually buy and sell the securities in the more intuitive trading order.
A major hurdle to proving standing in suits involving short

selling is the fact that proving injury is also exceedingly difficult.
Continuing the analogy, short sellers arguably "lack standing to

avail themselves of the securities laws" both because they "effectively sold their stock before they purchased it" and because
they have different purposes in trading than traditional investors.227 Because traders who know that a misrepresentation is
inflating a security's price are more, not less, likely to execute
their short sales, proof of transaction causation is virtually impossible. The inclusion of short sellers in a class can therefore
"prevent plaintiffs from establishing materiality, reliance, or
fact of injury with common proof, threatening predominance."228
Rather than seeking to profit from a company's good fortune and
strength, short sellers seek to gain from the company's decline.
However, in Zlotnick, the Third Circuit held (and no other
circuit has yet questioned) that short sellers indeed have standing to pursue Rule 10b-5 claims because these traders both buy
and sell securities.229 Short sellers can even be appointed lead
plaintiffs for a class of shareholders.230 Indeed, even option traders, who arguably do not buy or sell securities, have standing to
sue under Rule 10b-5 and the federal securities laws,231 so merely extending the ability to sue to high-frequency traders does not
seem problematic in this regard.
Unfortunately for high-frequency traders, the analogous
benefits end there. While the Third Circuit acknowledged that
short sellers have standing to sue under Rule 10b-5, it declined to extend Basic's presumption of reliance to the traders
227
228
229
230
Ganesh, 183 FRD at 490.

Roosevelt, 22 Rev Litig at 414 (cited in note 209).
Zlotnick, 836 F2d at 821.
See, for example, Fields v Biomatrix , Ine , 198 FRD 451, 461 (D NJ 2000).
231 See Fry v UAL Corp , 84 F3d 936, 939 (7th Cir 1996); Deutsehman v Beneficial
Corp , 841 F2d 502, 508 (3d Cir 1988). Courts have also found that the fraud-on-themarket presumption protects option traders who trade on widely utilized markets. See,
for example, Tolan v Computervision Corp , 696 F Supp 771, 773-74 (D Mass 1988).
and instead required them to show actual reliance.232 Because

the trader in Zlotnick "decided that the market price was not an
accurate valuation of the stock at the time of his short sale,"
the court found it inappropriate to presume that it was "reasonable for him to rely on the market price at the time of his
purchase."233
The case for a presumption of reliance is even weaker for
high-frequency traders. Traders using HFT likely do not have
prior knowledge that a misrepresentation is affecting the stock
price, and furthermore do not rely on price in the same way that
short sellers do. Rather than rely on their individual notions of
what the true value of the stock is, high-frequency traders instead rely on the existing demand for a particular stock. Without
a preexisting market for a security, there is little room for a
high-frequency trader to enter the market in the first place. Indeed, high-frequency traders are seemingly indifferent to the actual price of a security; so long as their entries fall within the
current bid- ask spread and there is some price movement allowing them to move in and out of positions, they can reap large
profits on the trade. Nevertheless, HFT firms and traders may
argue that, because HFT algorithms account for the behaviors of
other traders, misrepresentations will harm high-frequency
traders in the same way that they harm slower traders. However, this argument is weakened by the fact that high-frequency
traders are better able to predict price movements than conven-
tional computerized traders234 - so they will also be ahead of

any changes in the market when corrective disclosures are
made and the truth is revealed.235 In this sense, high-frequency

traders rely even less on market prices than short sellers - who
at least initially base their individual valuations on the market
price - and should be similarly unable to invoke a presumption
of reliance.
232 Zlotnick, 836 F2d at 822-23.

233 Id at 823.
235 See, for example, Lewis, Flash Boys at 268-69 (cited in note 87) (noting that
high-frequency traders who can detect changes in the market can warn their computers
in New Jersey of price movements in Chicago and then withdraw bids for individual
stocks before the rest of the market realizes that the price has fallen).

Conclusion
In coming years, HFT will change the existing landscape of

securities class actions. The implications of HFT on determinations of market efficiency are uncertain, and the new technolo-
gies and strategies that continue to be introduced into the
market will present novel challenges - procedural and otherwise - for courts to address as more cases are litigated.
While Halliburton II altered the mechanics of securities
class actions and the fraud-on-the-market presumption, it did so

in a way that encourages more discovery and research early in a
case and as yet has an unknown impact on litigation. Earlier

consideration of price-impact evidence might encourage a shift
away from arguments about efficiency - a contentious point
among empirical economists and jurists alike - or might result
in more battles of the experts as new, untested damages models
emerge from the financial literature. Shifting the proof of loss
causation to after the class-certification stage will give litigants
time to develop the event studies and additional data regarding
HFT to make such showings.
The current state of litigation involving HFT, in the form of
suits like City of Providence, reflects the prevailing view that
high-frequency traders are villains. As such, claims of market
manipulation and fraudulent misrepresentation have been the
most popular and, consequently, the fraud-on-the-market presumption will likely continue to be an effective tool for these
plaintiffs. A hybrid misrepresentation/manipulation claim may
also be useful against HFT defendants, and indeed, some courts
have recognized an opening for a fraud-on-the-market theory
when misrepresentations are made about the market in which a
security trades. Additionally, because high-frequency traders
seek to profit off of slower traders and to create a false impression of market activity through facially legitimate trades, plaintiffs bringing these claims should look to revive the Rule 10b-5
theory of open-market manipulation for recovery. Such a strategy would remove the reliance requirement, which would be advantageous to plaintiffs if the fraud-on-the-market presumption
proves inapplicable.
Like many other new technologies, however, HFT may
reach a point of such widespread adoption that it will be used

not only by banks' in-house proprietary traders but also by individual investors. At that point, judges ruling on certification mo-
tions for putative classes of HFT investors will need to consider
some of the procedural issues addressed in this Comment. The

comparison of high-frequency traders to short sellers suggests
that HFT plaintiffs should have standing to sue and that they
may also serve as lead plaintiffs in these actions. Similarly,
based on existing class actions involving variegated investors
within the same suit, high-frequency traders could structure and
subdivide their plaintiff classes to avoid issues of typicality and
predominance that might otherwise prevent access to classwide
relief. However, issues of reliance will likely prove insurmountable for HFT plaintiffs due to the traders' seemingly absent concern for the market price of the securities in which they trade.
In the coming years, HFT-related issues beyond those discussed in this Comment will undoubtedly surface and eventually
reach courtrooms across the country. Regardless of whether
high-frequency traders come to court as plaintiffs or defendants, the advent of HFT marks a changed circumstance that
the securities-litigation bar will have to wrestle with in the
near future.

9 - Trading and Securities

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Too Fast, Too Frequent?

High-Frequency Trading and Securities Class Actions

Too Fast, Too Frequent? High-Frequency

An individual investor calls his broker and requests

shares of that stock are currently being offered at $10 a share,

Exchange (NYSE), 3,000 on NASDAQ, and 3,000 on the BATS

Global Exchange, for a total of 10,000 shares.1 Satisfied with his

for his client.

This rapid, blink-of-an-eye increase in price is but one side

cated at different physical distances from the NYSE, NASDAQ,

1512 The University of Chicago Law Review [82:1511

fewer than the anticipated 10,000 shares due to the increased

HFT has been gaining traction in the marketplace since the

The advent of HFT presents complicated issues within the

essary to examine how investors currently seek recourse for

losses incurred on the market.

This Part proceeds in two stages. Part I.A provides an

the provisions relating to manipulation and distinguishes the

2015] Too Fast, Too Frequent? 1513

ket and 9 theories of manipulation.

1. Liability for fraudulent misrepresentations under

volving the national securities exchanges.3 Section 10(b) has

been referred to as a "catchall provision," as it "lumps together

passage of the Exchange Act, the Securities and Exchange

Commission (SEC) promulgated Rule 10b-5, which prohibits any

1514 The University of Chicago Law Review [82:1511

the purchase or sale of any security.5 While neither 10(b) nor

have recognized such actions as implied by both the statute and

2. Market manipulation and open- market manipulation

(c) To engage in any act, practice, or course of business which operates or

would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

2015] Too Fast, Too Frequent? 1515

ditional manipulation involves conduct that is "inherently or

1516 The University of Chicago Law Review [82:1511

of market activity."15 In contrast, the DC Circuit has instead re-

lied on the legislative intent underlying the Exchange Act to

nipulation if done with manipulative intent.16

ements of an open-market manipulation claim. These include

3. Market manipulation under 9.

An alternative to claims brought under 10(b) are claims

dresses the manipulation of securities prices, it does not include

the reliance requirement present in 10(b) and Rule 10b-5.21

However, 9 does require a showing of specific intent "for the

purpose of inducing the purchase or sale of such security by

19 See In re College Bound Consolidated Litigation , 1995 WL 450486, *6 (SDNY).

2015] Too Fast, Too Frequent? 1517

B. The Fraud-on-the-Market Presumption of Reliance

lent misrepresentation brought under 10(b) and Rule 10b-5

in securities-fraud class actions. Because of the potential for

under FRCP 23(b)(3), which additionally requires that "ques-

tions of law or fact common to class members predominate over

25 Larry Bumgardner, The Fraud-on-the-Market Method of Proving Securities

26 See FRCP 23(a).

1518 The University of Chicago Law Review [82:1511

every plaintiff class member would prevent many suits from

ing the presumption's predicates, and then examines the Su-

preme Court's most recent case addressing this issue.

1. Asserting and rebutting the fraud-on-the-market

The fraud-on-the-market presumption of reliance is based

the price set by the market does so in reliance on the integrity of

[the market] price."35 When the presumption is available, plain-

nate the need to prove individual reliance with respect to certain